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Paulson’s proposal is dead on arrival

Mar 31, 2008
By FLYP Staff

“I do not believe it is fair or accurate to blame our regulatory structure for the current turmoil,” remarked Treasury Secretary Henry Paulson, as he announced his proposal today to reform financial market regulation.

In fact, what Paulson really seems to believe is that there has been too much regulation (hard as that is to believe). His proposal would combine several regulators and give the Federal Reserve enormous power—primarily to use in emergencies.

At least Paulson is consistent. Since he doesn’t think the regulatory structure is the problem, he also doesn’t think more regulation is the solution. That conclusion flies in the face of the reality that Bear Stearns, and other firms, have been taking on too much risk with too little capital in reserve. It is a great way to make money when the markets are booming, but leaves taxpayers with the bill if the problems that emerge threaten “the system.”

So the government commits $29 billion so JP Morgan could pay Bear Stearns shareholders $10 per share: The shareholders get something, JP Morgan gets a lot and taxpayers assume the risk. Clearly, a Republican is in the White House.

Paulson’s proposal is already dead on arrival, for at least two reasons. First, Congress is deferring all serious decisions to whoever will take office next January. The Bush era of too much de- and un-regulation is over. Second, Paulson, a life-long investment banker, failed to recognize the one thing that most needs to be done: regulate all the commercial-banks-in-all-but-name—investment banks, insurance companies, hedge funds, etc.—because they expose investors, consumers and the country as a whole to unacceptable risks when things go wrong.

We know who’s worrying about the bankers. Who is worrying about the rest of us?

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what did Bernanke do different, not much?

doug dunn
Dec 6, 2009

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