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More regulation

Treasury Secretary Henry Paulson recently released his much awaited report, Blueprint for a Modernized Financial Regulatory Structure. The Paulson report contains a set of proposals that, taken together and if adopted, would constitute the most comprehensive restructuring of the US system of financial institution regulation and financial market oversight since the Great Depression. Among the highlights are proposals that would expand greatly the Federal Reserve's authority; concentrate insurance industry regulation in a new federal agency, the Office of Insurance Oversight; increase the responsibilities of the Office of the Comptroller to include regulation of thrifts and eliminate the Office of Thrift Supervision; merge the Securities and Exchange Commission and the Commodity Futures Trading Commission; and add a new regulatory entity, the Business Conduct Regulator, to oversee business conduct and consumer protection. This new regulator would also oversee the safety and soundness of most of the major participants in the US capital markets. Paulson's plan also would ask Congress to establish a federal Mortgage Origination Commission that would recommend licensing standards for mortgage brokers.

Reactions to the Paulson plan have been consistent. While the provisions are expected to stimulate an important dialogue, few, if any, commentators give most of them much chance of being adopted. One commentator noted that some proposals contained in the plan have been discussed off and on for years without any serious enthusiasm. For example, a merger of the SEC and CFTC has been considered by various administrations. Although elements of the Paulson plan had been under consideration for quite some time, its announcement at this point in the credit crisis appears to suggest that an absence of regulation or a failure of regulation are to blame for the current market predicament. In response to the plan, SEC Chairman Cox noted that financial services regulation in the US needs to: "be better integrated among fewer agencies, with clearer lines of responsibility". It is difficult to see how Paulson's plan avoids duplication or results in fewer regulators.

There also is a general sense that although our present system of banking, securities and commodities regulation evolved over a long period of time and may have been the result of a series of historical anomalies, that does not mean that it is neither sound nor generally effective. The report expresses concerns about risk dispersion, financial product innovation and complexity. Again, it seems fair to ask whether innovation and complexity really are to blame for the credit crisis. The report contemplates a regulatory scheme that would be a cumbersome, expensive and wasteful impediment to the goal of making the US capital markets competitive on a global basis.

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