ECONOMY

Documents & Texts from America.gov

07 April 2008
Debate Begins over U.S. Government Role in Capital Markets

By Andrzej Zwaniecki
Staff Writer

This is the third and final article in a series on the turmoil in the U.S. financial markets and efforts to address it.

Washington -- A Bush administration proposal for sweeping financial institution regulatory reform is stirring debate about the role of government in capital markets.

Treasury Secretary Henry Paulson, who unveiled the reform “blueprint” March 31, said the ideas it contains require “thoughtful discussions,” which he did not expect to be concluded in the near future.

Almost all experts, both inside and outside government, agree that the current system, a patchwork of poorly coordinated agencies with often overlapping authorities, is convoluted and inefficient. Some of the agencies date back to the Civil War of the 1860s, although most were established during the Great Depression in the 1930s. The experts say these agencies have not kept pace with globalization and evolution of the financial industries. Many believe that gaps in the regulatory system have allowed troubles in the capital markets to reach crisis proportions before regulators could notice them and react.

But views on how and when to fix the system vary.

The Treasury’s long-term plan calls for making the Federal Reserve, the U.S. central bank, a “market stability regulator” with expanded oversight powers over all financial market participants. The recommendations also include creating two new regulatory bodies -- a "prudential financial regulator" for the nation's banks, thrifts and credit unions and a second entity that would oversee business conduct and consumer protection. The regulatory restructuring would involve abolishing some agencies and merging their functions, as well as shifting regulatory powers among them.

“We should and can have a structure that is designed for the world we live in, one that is more flexible, one that can better adapt to change,'' Paulson said.

Most of the proposed changes would have to be enacted by Congress, where reactions to the “blueprint” were mixed. Most Republicans welcomed it, but Democrats were divided.

Chairman of the House of Representatives’ Financial Services Committee Barney Frank, a Democrat, praised the plan as a “very constructive step forward,” although he disagreed with some specific recommendations. Frank’s own proposal would subject all credit-creating financial institutions to the same type of prudential supervision that now applies only to banks.

Senate Banking Committee Chairman Christopher Dodd, a Democrat, charged that the Treasury’s plan would do nothing to end the housing crisis and help millions of Americans affected by it.

Paulson suggested that the recommendations were not meant to solve the current crisis but rather to help the government deal more effectively with future market disruptions.

The housing and mortgage issues are likely to dominate the congressional agenda in 2008, leaving long-term regulatory reform for the next president and Congress to handle, according to congressional leaders and observers.

All three candidates in the presidential race offered cautious endorsement of at least some parts of the Treasury’s plan. Democratic Senators Hillary Clinton and Barack Obama said it falls short of what is needed to address the credit and foreclosure crisis. Republican Senator John McCain said the financial troubles indicate that more regulatory oversight is needed.

Most entities with a stake in the issue support the idea of one body that ultimately is responsible for the stability of the U.S. financial system, according to Hal Scott, a professor at Harvard Law School. But that is where the agreement ends.

“The question is what that body is and how much authority it has,” he told America.gov.

Scott directs the Committee on Capital Market Regulation, an independent and bipartisan group of financiers, lawyers and academics. He said the challenge is to make the regulatory structure not only more efficient but also more flexible so it helps the financial industry become more competitive.

The Treasury Department actually began working on the “blueprint” in the spring of 2007, with the aim of helping U.S. financial companies become more competitive. Wall Street companies had pressed for a more coordinated, but relaxed, regulatory regime, which they had viewed as a necessity for them to become more competitive with other global financial centers such as London and Hong Kong. When market developments brought the market stability issue into the spotlight, however, the work broadened.

Most financial companies, which prefer a principle-based regulatory system with a set of guidelines rather than a prescriptive, rule-based one, have applauded the Treasury’s plan. Only a banking industry group has expressed dissatisfaction with it.

But consumer groups and some legislators have cried foul.

“It takes a certain chutzpah to say the appropriate response to a financial crisis is to loosen regulations,” said Barbara Roper of the Consumer Federation of America.

Paulson supports the principle-based approach, to a degree. He said more rules are not “the answer” to the financial turmoil.

The full text of Paulson’s remarks is available on the Treasury Department Web site. The texts of Frank’s statement and Dodd’s statement are available on the Web sites of the committee’s they chair.

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