Under the Treasury proposal, while the Fed would have some authority to stop financial institutions from taking on too much risk through the use of exotic financial instruments, it appears that little would be done to limit the flow of such new products.
The Treasury says that it and other federal regulators still believe a principle it enunciated a year ago, “that market discipline is the most effective tool to limit systemic risk.”
That discipline was largely lacking when the problems were being created, but now has returned with a vengeance, leaving banks with securities of dubious value that cannot be sold at any price that even approaches what they were thought to be worth only months ago.
Dems have to be cautious not to be duped. The Times reports,
Democrats reacted with some praise. “It’s a recognition, maybe a reluctant one, that you have to enhance regulation,” said Rep. Barney Frank, a Massachusetts Democrat who is chairman of the House Financial Services committee.
Frank should know better. This is not enhancing regulation. There are no teeth to this proposal. It is impotent.
Here's an example of how Paulson's plan opens new doors and cuts regulations:
Arthur Levitt, a former chairman of the S.E.C., ...said he was concerned by proposals to expand the authority of self-regulatory organizations, like stock exchanges. As an interim step, Mr. Paulson proposed allowing those organizations to change their rules without seeking explicit approval from regulators.
“They have acted in their own self interest too often to allow them to get out from under the oversight process,” Mr. Levitt said.
We should assume this is the tip of the iceberg in the 200 page document.
And we should assume that Bush has no intention to clean up this disastrous, mega-destructive mess, just as he has no intention to clean up the Iraq Occupation mess. Paulson is engaging in delay tactics, as the NY Times reports:
Mr. Paulson, in the speech to be delivered Monday, says the long-term proposals he is making should not be acted upon while the current market stresses remain severe. Instead, he says, no final decisions should be made “this month or even this year.” Next year, of course, a new president will take office.
Here's what mediachannel's Schechter has to say on delay,
This is one more effort to appear to at least be doing something, as the blog Naked Capitalism explains:
“There is less here than meets the eye, and what is here is guaranteed not to be implemented during the remaining months of the Bush presidency. And that of course is precisely the point of this exercise. Appear to be doing something and dump the mess in the lap of your successor.
To the details—Remember where we are: we’ve had years of misguided confidence that investment banks could be left to their own devices, that the wonders of the originate-and-distribute model meant Things Were Different This Time. Specifically, the powers that be believed that risks were so widely spread and diversified that the financial system was now much more resistant to systemic shocks. We’ve seen what a crock that idea was.”
