Paulson on Market Reform

Excerpt from Remarks by Secretary Henry M. Paulson, Jr. on Economy and Markets before Women in Housing and Finance, June 19, 2008:

When we published the Blueprint in March, I made clear I believed we were laying out a long-term vision that would take time to consider and implement. Since then, the Bear Stearns episode and market turmoil more generally have placed in stark relief the outdated nature of our financial regulatory system. We are working with the Fed and the SEC on the immediate issues raised by the Fed's provision of liquidity to the primary dealers. But we must dramatically expand our attention to the fundamental needs of our system, and move much more quickly to update our regulatory structure – always keeping in mind that there must be a balance between market discipline and market oversight.

I see three clear lessons from the experience of recent months:

First, we should quickly consider how to most appropriately give the Federal Reserve the authority to access necessary information from complex financial institutions and the authority to act to mitigate systemic risk in advance of a crisis.

Second, we need to take several critical steps to make sure that market discipline continues to play the vital role it needs to play to keep our financial system in balance, as we work to ensure the system's stability. To reduce the perception and the likelihood that a complex financial institution is too interconnected to fail, steps are needed to strengthen our practices and financial infrastructure in the OTC derivatives market and in the tri-party repo system, and to provide greater certainty around the mechanics of winding down a failed institution that is not a federally insured depository institution.

Third, we must re-examine the emergency authorities of the Federal Reserve, Treasury and other financial regulators to ensure they are adequate to the roles they are expected to play in today's modern and multi-faceted financial system.