It’s being called the broadest overhaul of Wall Street regulation since the Great Depression. But look closely at the proposal announced this morning by Treasury chief Hank Paulson, and you’ll find a thin veneer of regulatory filagree — designed to appease a public outraged by the mismanagement of its savings and the taxpayer-financed bailout of Wall Street’s well-padded executives, but also, sadly, designed to accomplish just about nothing.
Paulson rearranges and consolidates lots of regulations and seems to beef up the oversight responsibilities of the Federal Reserve. But the Fed would not routinely examine the books of investment banks and hedge funds the way bank examiners now scrutinize regular banks, and agencies like the SEC would actually lose some of their current authority.
Most significantly, the proposal doesn’t call for investment banks, hedge funds, and other currently unregulated financial institutions to hold capital assets proportional to the risks they’re taking on. That’s the case even though the Fed has now subjected taxpayers to the risk of bailing out any large financial institution that gets into trouble because it doesn’t have enough capital to back up its risky bets. Even though two-thirds of subprime mortgages issued in the last five years originated with non-banks that have little or no capital requirements. Even though 80 percent of all lending today is from unregulated banks that hold almost no capital assets.
Paulson says he doesn’t blame the current regulatory structure for current market turmoil. Well, Hank, if it’s not the current Wild-West take-any-risk with other people’s money non-regulatory structure we have now, how do you explain the housing bubble and the credit meltdown and the taxpayer bailout of Wall Street? How exactly are your proposed fixes going to prevent another crisis?
Hank Paulson’s discussion paper – it’s not even meant to be enacted under the Bush Administration – is not broad, it’s not an overhaul, and heaven forbid, if we’re facing another Great Depression, it will do absolutely zilch to head it off.