Judging by the heated reaction of members of Congress, Wall Street, the insurance industry, the savings-and-loan and regional-bank industries, etc., Treasury Secretary Henry Paulson's plan to revamp the nation's financial regulation is pretty good.
Judging by the heated reaction of members of Congress, Wall Street, the insurance industry, the savings-and-loan and regional-bank industries, etc., Treasury Secretary Henry Paulson's plan to revamp the nation's financial regulation is pretty good. According to The New York Times, Sen. Christopher J. Dodd, the Connecticut Democrat who heads the Senate Banking Committee, described Mr. Paulson's proposal as "a wild pitch. It is not even close to the strike zone."
We would call it a brushback pitch, designed to get the batter's attention — and judging by the reaction of all the players, it has done just that. Anything that gets so many different groups angry must be hitting pretty close to home.
We are pretty sure that Mr. Paulson knew before he released his reorganization plan that there was little chance of it being enacted anytime soon, if ever, in its entirety.
Congress is focused on one goal right now: soliciting votes in the upcoming election by doling out billions of dollars to constituents who might be in trouble with their mortgages.
But Mr. Paulson clearly wanted to start the financial debate on the larger problems and to propose ideas to provide debating points. Once the crisis has passed, interest in reform may wane.
The regulatory system has grown by accretion over time as Congress has reacted to change and problems in the financial system. This has led to the development of an inefficient regulatory structure that doesn't do what it is supposed to do: protect investors, savers and consumers while ensuring the smooth functioning of the financial system.
As we noted in last week's editorial, the current system has inefficient gaps and occasional redundancies, but the different agencies rarely cooperate. They run in different channels until there is a disaster, and then they flood together and accomplish little.
ADDRESSING WEAKNESSES
Mr. Paulson's proposal addresses this channeling, combining similar functions into one agency. All his ideas try to address acknowledged weaknesses in the regulatory framework.
For example, he proposed giving the Federal Reserve Board oversight of the investment banks.
That is a logical change given that the Fed has opened its doors to borrowing by the investment banks.
As the primary functions of the Fed are conducting the nation's monetary policy to pursue maximum employment, stable prices and moderate long-term interest rates, as well as to ensure the safety and soundness of the nation's banking and financial systems, it must have more authority over the investment banks.
Unfortunately, much of the reaction has been about people fearing that they are losing power, authority or cozy relationships, though clearly, Mr. Paulson and his Treasury advisers didn't get everything right.
While giving the Fed increased oversight of the investment banks, the proposal said nothing about the Fed's power to take action against them or any other financial institution that may cause problems.
The regulation of brokers, investment advisers and financial planners is one area where Mr. Paulson's vision isn't clear, though it ultimately would fall under his new Conduct of Business Regulatory Agency. This agency is charged with consumer protection across all types of financial firms.
Mr. Paulson has laid out a promising outline for comprehensive reform of the nation's financial regulatory system. The details of the reform of the system now must be debated by Congress in the coming months and (not too many, we hope) years, with input from the various segments of the industry.
Hopefully, all sectors of the industry will approach the reform keeping in mind the needs of the country for a stable, efficient financial system, not parochial interests of power and influence.
