Bernanke, Paulson Want More Financial Regulations

Starting in the 1980s, deregulation of financial markets has been de rigueur. That era appears to have ended yesterday with US Treasury Secretary Henry Paulson and the Fed Chairman Ben Bernanke asking Congress to enhance the Fed's power to increase bank supervision and give it greater power to intervene in the financial markets. It seems there needs to be a sheriff in Dodge City after all.

Mr. Paulson said, “The Bear Stearns episode and market turmoil more generally have placed in stark relief the outdated nature of our financial regulatory system, and has convinced me that we must move much more quickly to update our regulatory structure and improve both market oversight and market discipline.” He also said, “We should consider how to most appropriately give the Federal Reserve the authority to access necessary information from complex financial institutions . . . and the tools to intervene to mitigate systemic risk in advance of a crisis.”

For his part, Mr. Bernanke stated, “"Cooperation between the Fed and the [Securities and Exchange Commission] is taking place within the existing statutory framework with the objective of addressing the near-term situation. In the longer term, however, legislation may be needed to provide a more robust framework for the prudential supervision of investment banks and other large securities dealers . . . . Congress should consider requiring consolidated supervision of those firms and providing the regulator the authority to set standards for capital, liquidity holdings, and risk management..”

They did their best to keep singing from the Deregulatory Hymnal. Mr. Paulson said, “Regulation alone cannot eliminate all future bouts of instability.” And he (the man who helped save Bear Sterns earlier this year) added, “For market discipline to effectively constrain risk, financial institutions must be allowed to fail.” Mr. Bernanke harmonized, “Private equities are a very good source of capital. We are currently looking [at rules governing investments in banks] in the hope that we will make a clear statement about when private equity can come in and add capital.” Private good, federal bad.

Still as Congressman Barney Frank (D-MA) noted, a “consensus” is emerging that the Fed should take on more authority. Some overly certain commentators have suggested this will come at the expense of the SEC. The truth is more regulation is coming, and both bodies will gain power over the markets. The era of deregulation is over.

© Copyright 2008 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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