As Treasury Secretary Henry M. Paulson Jr. on Monday formally laid out an ambitious plan to overhaul the regulatory apparatus that oversees the country’s financial system, senior lawmakers and lobbyists from industries opposed to the plan predicted that most of it would be dead on arrival.
Paul Krugman is not impressed. No surprise there.
"it’s all about creating the appearance of responding to the current crisis, without actually doing anything substantive."
The key issue is actually fairly straightforward. Banks, like Citibank, Wells Fargo, etc., the kind where people put money into a normal checking account, are regulated by the federal government. In return, the government guarantees deposits, up to certain limits. This is a result of all the bank failures during the Great Depression. The federal government is kind of like a parent: you live in my house, I pay for the roof over your head, you play by my rules.
Investment banks, on the other hand, don't have the same kind of regulatory oversight. So they can make deals and buy and sell stocks and bonds and commodities and derivatives and all kinds of exotic financial instruments without the constraints that regular banks have. But they're not guaranteed by the feds like the banks. More freedom, but more risk.
Bear Stearns changed that, because Bear Stearns's survival, such as it was, was backstopped by the government. So now the investment banks, or at least one, are moving back in with the parents. They very well need the money that only the federal government can provide. And they clearly need the kind of supervision that only the government can provide. Will that happen under the current regime? Krugman, of course, is not optimistic, given the track record:
"The Bush administration, however, has spent the last seven years trying to do away with government oversight of the financial industry."
I'm going to be following this. There are a couple of political implications up front: Chris Dodd is the key player in the Senate, and Barney Frank in the House. I'm very glad both of them are on the case, I have a great deal of respect for both. Dodd is an interesting player, because, as the Senator from Connecticut, Wall Street is in his backyard, and there are a lot of Wall Street types among his constituents. So he might come across as a Wall Street guy. But he won a lot of street cred taking on Bush over wireless wiretapping, so liberals will probably have faith in him. And you just have to listen to Barney Frank talk policy to realize he's brilliant.