April 3, 2008
Treasury's New Plan
By now most have in the financial community have digested the details of Sec. Paulson's grand plan to reorganize federal financial regulations in the country. The plan augments the power of the Federal Reserve Board to step in when there is a financial crisis. The plan establishes three agencies with different task -- one to regulate the stability of the market, another to regulate financial market competition, and yet another to protect investors. Part of the plan is, for example, a merger of the SEC and CFTC. Hidden in the plan are proposals to lighten regulation -- for example, a proposal to lighten regulation of securities exchange rules on listings. This plan has no chance of approval -- it is too complex, upsets too many apple-carts, and appears in an election year and a year in which the economy is staggering. Why propose it then? Simple. What makes the knees shake of government officials, even those that favor market based solutions over government based solutions to economic cycles, is getting condemned in the history books as having done "nothing" while the people suffer. This plan is a CYA for Paulson. He can claim to have done "something" to solve our economic problems. The proposal of the plan itself is an illustration as to why government ought not have the power the plan gives the FED. There is too much pressure on government officials in a downturn to "do something" and that pressure, more often than not, leads to counterproductive actions. It is well known that Herbert Hoover should not be criticized for doing nothing during the early days of the depression; he should be criticized for doing stupid things in response to pressure -- increasing tariffs and increasing taxes. The plan, increasing the power of the Fed in crisis times, is likely to lead to more problems than corrections.
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