Why Fed reform won't work.

Commentary about business and finance.
March 31 2008 5:27 PM

Why Fed Reform Won't Work

Yes, the financial regulation system needs overhaul, but the proposed plan is a Band-Aid for Wall Street's mortal wounds.

Read more about Wall Street's ongoing crisis.

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Or let's say that the Fed knew that flawed risk parameters were being used to evaluate these flimsy securities. Wouldn't enforcing penalties be construed as an infringement on free-market capitalism?

The Paulson plan does nothing to give the oversight agencies any more legal standing to intervene or enforce than they already possess. That's hardly surprising, given the vociferous opposition that greater regulation faces from Wall Street firms (to say nothing of barely regulated hedge-fund and private-equity firms).

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This isn't to say that requiring greater transparency from the banking industry is a bad thing. But the illusion of greater transparency at the expense of true insight is a new disaster waiting to happen. It's like jumping out of a plane with a faulty parachute; the idea of the parachute gives you confidence, but that complicated drawstring that won't engage will get you every time.

Given this, it might be construed as a blessing that Paulson's proposed reforms seem unlikely to be enacted anytime soon. On Monday, Paulson said: "These long-term ideas require thoughtful discussion and will not be resolved this month or even this year."

Well, he's right about that. All of the plan's suggestions are cosmetic. Instead, let's please have a serious discussion about the nature of the banking system structure itself: its complexity, its responsibility, and the proper role of the federal government in regulating it. The United States has had such a debate before, leading up to the landmark 1933 Glass Steagall Act. We can and should have such a sweeping debate again.