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Treasury pitches regulatory overhaul

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adrock3215
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Mr. Paulson has proposed an initiative overseeing the largest increase in government power over financial markets in some time. Some things from the article:

The regulatory blueprint proposes eventually vesting new powers in the Federal Reserve as a "market stability regulator" -- effectively formalizing a role the central bank already has started to perform recently by expanding the list of financial firms who can borrow directly. It would give the Fed authority to demand that all financial system participants supply it with full information on their activities and grant the Fed a right to collaborate with other regulators in setting rules for their behavior.

Among changes, the Treasury wants to merge the Securities and Exchange Commission, the U.S. markets watchdog, with the Commodity Futures Trading Commission, which is charged with overseeing the activities of the nation's futures market.

In one important change to try to clamp down on mortgage brokers, the Treasury is urging the establishment of a "Mortgage Origination Commission" made up of regulatory agency representatives that would be able to set licensing standards for mortgage brokers.

What do you all think of these new developments? They all seem poorly reasoned. Merging the SEC and CTFC is an idea that doesn't make much sense. What do the commodities and futures markets have to do with the mortgage crisis? But particulary harmful will be the expansion of Fed powers. That is what caught my attention from his proposal. The Fed's power over markets has been steadily increasing since the Federal Reserve Act. What exactly is a "market stability regulator"? The answer of late seems to be that it is a team consisting of Fed/Treasury/White House officials who come to the rescue whenever the S&P or Dow futures point to a lower market-open. Between 8 and 9 AM EST some official will come out with a statement such as this one which sends the market higher before opening. The financial markets, particulary commodity and futures markets, are the last relatively free markets on the planet. This plan is another step toward socializing those markets. And this coming from Mr. Free Markets Paulson, who, by the way, helped to engineer a part of this "credit crisis" when he was head at Goldman Sachs.

Edited by adrock3215
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I find this story fascinating because as I recall, Paulson came to speak at Dartmouth's 2007 graduation and I listened to the speech (my best friend was graduating). He seemed fairly pro-free market and I am surprised to hear this coming down from him. Apparently he is not what he seemed. I think the current crisis shows we need to drastically cut back the Fed's power, not increase it. Suppose I'll have to keep an eye on this Paulson fellow.

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Wall Street Journal has had several articles on this. Basically Paulson wants to give the FED "supercop" powers.

When I first read Atlas, I thought Rand's examples were way overblown. If you keep your eyes open you realize that she couldn't make up stuff worse than this sort of measure.

It is the exact opposite of what should be done, considering it was FED monetary policy that caused the crisis in the first place.

I feel a blog rant coming on... :)

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Kendall,

Join the club for a blog rant on this topic. Mine has been building ever since I heard about this. Time permitting, I will do it. Paulson is a Nixon-type conservative, a complete pragmatist. I heard him speak about the sub-prime crisis about two months ago. Immediately at the beginning of his speech, he declared he does not adhere to specific principles. He just wants to do what "works." He is bipartisan and can work with anyone.

Well, Nixon had that attitude and we got one of the largest peacetime expansions of government power in our history: EPA, OSHA, wage-price controls, etc. Ugh!

Of course, Bush is too ignorant of principle or economics to resist Paulson. Bush probably just thinks, "He's from Goldman. He must be smart. I will have faith in him." That is Bush's problem, too much faith. But that is another rant...

-GB

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When I first read Atlas, I thought Rand's examples were way overblown. If you keep your eyes open you realize that she couldn't make up stuff worse than this sort of measure.

Funny you should mention this...I felt the same way about a year ago when I was reading AS. When the People's State of Mexico took over the copper mines, I thought, no way...too unrealistic. Then the very next day, Chavez nationalized his country's oil fields. So much for unrealistic. :)

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Funny you should mention this...I felt the same way about a year ago when I was reading AS. When the People's State of Mexico took over the copper mines, I thought, no way...too unrealistic. Then the very next day, Chavez nationalized his country's oil fields. So much for unrealistic. :)

By the time I'd read it I'd seen too much crap from the New Zealand Labour Party lead government to think that way. In fact in some cases I thought, "I've seen worse." Their proposal to enforce both local loop unbunndling and a three-way operation seperation (wholesale, network, and retail) on Telecom New Zaealand is one example of a real life case I had seen that made the AS stuff a lot easier to believe.

(For those that are interested both LLU and the three way seperation passed. LLU is already in effect and the seperation is soon to come into effect.)

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I saw Glenn Beck show covering this topic. I have grown to like his show a lot. He seems like the only voice of sanity on TV these days. He kept saying last night (or was it the night before?): I don't trust the government anymore with anything. What we need is the opposite - more deregulation. It was refreshing to hear.

Edited by ~Sophia~
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I saw Glenn Beck show covering this topic. I have grown to like his show a lot. He seems like the only voice of sanity on TV these days. He kept saying last night (or was it the night before?): I don't trust the government anymore with anything. What we need is the opposite - more deregulation. It was refreshing to hear.

Yeah, he has those moments. The he has moments when has has preachers come on and talk about the end of the world. :P

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http://www.tcsdaily.com/article.aspx?id=032408B

"Some of the greatest economists have explained that part of that instability was caused not because private banks were free to issue currency (even as late as 1907) but because the government maintained a policy of rewarding irresponsible behavior by rescuing financial institutions when they reached the verge of collapse."
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Well, actually Mr. Paul questioned the ideology of this yesterday and had a pretty good conversation with Bernanke. The video is here: http://youtube.com/watch?v=NluFw00VRxU I will quote from the latter half of the conversation between Bernanke and Paul, which was pretty interesting to me.

Paul: It seems to me that the basic question we should ask is: Why do we have a business cycle? For 100 years the conclusion has been, philosophically, practically, and at the political level that it is a consequence of freedom, a consequence of capitalism. And therefore we need government to save us from freedom of choice personally. Could you tell me, do you accept the idea that the business cycle is a consequence of capitalism and freedom? Or could it be, like others say, it is a consequence of government interference?

Bernanke: Certainly large parts of the fluctuations in the economy are in large part due to the free market. There are probably also circumstances in which fluctuations are due to government intervention....

Paul:Well does the Federal Reserve contribute to the business cycle?

Bernanke: Well it has, most notably during the 70's...

Paul:Does excessive credit and low interest rates cause malinvestment?

Bernanke: Well, the question is a judgement about where interest rates ought to be...

I disagree with Paul on many things but his views on economics are for the most part accurate. However, he doesn't get taken seriously because of his lack of consistency in philosophy.

Edited by adrock3215
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I disagree with Paul on many things but his views on economics are for the most part accurate. However, he doesn't get taken seriously because of his lack of consistency in philosophy.

To me it proves that a really smart pragmatist is hardly an ally.

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Getting worse.....[Fed mulling options to widen lending power]

One option being considered is to have the Treasury borrow more money than it needs to fund the government and keep the proceeds on deposit at the Federal Reserve, the report said.

Other options include issuing debt under the Federal Reserve's name instead of the Treasury's, and asking Congress for immediate authority for the Fed to pay interest on commercial bank reserves rather than waiting until a law enacted earlier allows it to in 2011, according to the newspaper.

Also, from this article:

The central bank gave a breakdown of securities lent to dealers, saying $21.3 billion in an overnight facility were collateralized by Treasuries, while $64.3 billion in a term facility were collateralized by Treasuries, federal agency debt, and ``highly rated'' private mortgage-backed debt.

The Fed also reported that the M2 money supply rose by $32.2 billion in the week ended March 24. That left M2 growing at an annual rate of 6.5 percent for the past 52 weeks, above the target of 5 percent the Fed once set for maximum growth. The Fed no longer has a formal target.

Edited by adrock3215
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For me, or you, or the government to borrow more money than it needs or expects it will need during the term of the loan is such a stupid idea that only uber-rationalists (a.k.a. Phds in Economics) could come up with that one.

It seems a lot of people don't realise it is such a studpid idea. A New Zealand bank has just set up a 110% home loan through its subsidiary home loan company, Nationwide. It is only for professionals with good income prospects, but still this seems like a bad thing. Well, unless maybe the extra 10% is meant to be for things that may be needed or at least desired, such as renovation or doing up the house. However, I doubt that since usually you can get a home loan that includes the estimated cost for those renovations in your home loan, which leaves me wondering what the extra 10% would be for.

Story here.

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