Paulson's fixit plan for the financial markets: Less regulation, more power to the Fed
By Mike Whitney
Online Journal Contributing Writer
Apr 2, 2008, 00:55
It is being billed as a �massive shakeup of US financial
market regulation,� but don't be deceived. Treasury Secretary Henry Paulson's
proposals for broad market reform are neither �timely� nor �thoughtful�
[Reuters]. In fact, its all just more of the same free market �we can police
ourselves� mumbo jumbo that got us into this mess in the first place.
The real objective of Paulson's so called reforms is to
decapitate the SEC and increase the powers of the Federal Reserve. Same wine,
different bottle. Paulson's real motive is to preempt the regulatory
sledgehammer that is set to descend on the financial industry following the
2008 election. There's growing fear that President Obama will take his fire
hose down to Wall Street and flush out some of the cobwebs that have collected
in the market's dark corners.
If Paulson's plan is approved in its present form, Congress
will have even less control over the financial system than it does now and the
same group of self-serving banking mandarins, who created the biggest equity
bubble in history, will be able to administer the markets however they choose
without the annoyance of government supervision. That's exactly what Treasury
Secretary Paulson and his pals at the Fed want: unlimited power with no
Paulson is expected to lay out guidelines and principles
that are intended to help regulators supervise the financial markets. According
to AFP: �The President's Working Group on Financial Markets said the current
regulatory structure is working well despite calls by some US lawmakers.�
In other words, the failing banking system, the housing
meltdown, and the frozen corporate bond market are all signs of a robust
financial system? This may be the most ludicrous statement since �Mission
accomplished.� The system is imploding and real people are being hurt by the
fallout. Thirty years of industry-led lobbying has dismantled the regulatory
regime which made US financial markets the envy of the world. The credibility
and transparency are gone, along with the Depression era legislation like
Glass-Steagall and government oversight of over-the counter derivatives instruments.
Now the system is prey to all types of dodgy debt instruments, suspicious
"dark pool" trading and off-balance sheet operations which reinforce
the belief that cautious investment is no better than casino gambling.
"The regulatory line of sight today is by the
counterparties," the official said, adding that the guidelines should be
"beneficial to industry." [AFP]
How is that different from saying, �Caveat emptor"?
That's not a motto that inspires confidence. Many people still naively believe
that planning their retirement should not have to be a Darwinian tussle with a
crafty junk-bond salesman.
Under Paulson's plan, the Federal Reserve will be granted
new regulatory powers, but whatever for? The Fed doesn't use the powers it has
now. No one stopped the Fed from intervening in the mortgage lending fiasco, or
the ratings agency abuses or the off-balance sheet shenanigans. They had the
authority and they should have used it. The Fed knew everything that was going
on -- including the mushrooming sales of derivatives contracts which soared
from under $1 trillion in 2000 to over $500 trillion in 2006 -- but they
decided to cheerlead from the sidelines rather than do their jobs. The fact is,
they were worried that if they got involved, they might upset the gravy train
of obscene profits that was enriching their bankster friends.
Former Fed chief Alan Greenspan used to croon like a smitten
teenager every time he was asked about subprime loans or adjustable rate
mortgages. And, as New York Times columnist Floyd Norris points out,
"[Greenspan] praised the growth in the derivatives market as a boon for
market stability, and resisted calls to use the Fed�s power to increase
regulation.� Of course, he did. It was all part of Maestro's �New Economy�:
trickle-down Elysium, where the endless flow of low interest credit merged with
financial innovation to create a Reaganesque El Dorado. There are no
regulations in Eden; anything goes and to heck with the public; they can fend
Now its Paulson's job to keep the neoliberal flame lit long
enough to make sure that government busybodies and bureaucratic do-gooders
don't upset the applecart. That means concocting a wacky public relations
campaign to convince the public that Wall Street is not just a pirate's cove of
land-sharks and bunko artists, but a trusted ally in maintaining a strong
economy through vital and efficient markets.
The Times' Norris summed up Paulson's sham reforms like
this: �The plan has its genesis in a yearlong effort to limiting Washington's
role in the market. And that DNA is unmistakably evident in the fine print.
Although the proposal would impose the first regulation of hedge funds and
private equity funds, that oversight would have a light touch, enabling the
government to do little beyond collecting information -- except in times of
crisis. The regulatory umbrella created in the 1930s would grow wider, with
power concentrated in fewer agencies. But that authority would be limited,
doing virtually nothing to regulate the many new financial products whose
unwise use has been a culprit in the current financial crisis." [�In
Treasury Plan, a Reluctant Eye over Wall Street,� Floyd Norris, New York Times]
What nonsense. The house is on fire and hyperventilating
Hank is still wasting our time with this rubbish. The real problem is that
Paulson and his buddies at the Federal Reserve think of the financial system as
their personal fiefdom, so they refuse to loosen their hoary grip even though
the economy is listing starboard and the water is flooding into the lower
Once again, the New York Times: �All the checks and balances
in the plan reflect the mindset of its architect, Treasury Secretary Henry
Paulson, who came to Washington after a long career on Wall Street. He has
worried that any effort to substantially tighten regulation could hamper the
ability of American markets to compete with foreign rivals.�
No one elected Paulson to do anything. He has no mandate. He
is an industry rep who has worked exclusively for a small group of wealthy
investors who have put the entire country at risk with their toxic
mortgage-backed bonds, their reckless Ponzi-type speculation, and their
off-book chicanery. Paulson should be removed immediately and returned to his
wolf's lair at G-Sax. If Bush is serious about straightening out Wall Street,
then bring in Eliot Spitzer. He's available. And he'll do what it takes to
clean house, that is, put a truncheon-wielding robo-cop in every trading-pit at
the NYSE, and dispatch government accountants to every office of every CFO,
making sure they have a Big Red Pen in one hand and a Taser in the other.
That's the only way to get the attention of the bandit-class.
�I do not believe it is fair or accurate to blame our
regulatory structure for the current turmoil,� says Paulson.
Paulson is wrong. The current turmoil is all about the lack
of regulation and he'd better prepare himself for some big changes. The
pendulum is already in motion and tighter regulations will soon follow. There
needs to be an accounting process for all transactions and capital requirements
for every financial institution that creates credit. No exceptions. All of
these businesses pose a real danger to the overall system and, therefore, must
conform to clearly articulated and strictly enforced rules; no off-balance
sheet operations, no dark pool trading, no unregulated derivatives contracts,
no level 3 assets, no �mark to model� garbage bonds where CFOs unilaterally
decide what they are worth by picking a number out of a hat.
It's time to restore order to the markets so retirees and
working class families can feel safe investing in their futures. They are the
ones who are most hurt by Wall Street's trickery.
Paulson's plan is a nonstarter. The era of sandbagging,
supply-side banditry is over. Good riddance.
Whitney lives in Washington state. He can be reached at email@example.com.
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