The Treasury's Regulatory Overhaul

Absoulte power corrupts absolutely.

That is what I was thinking about after reading some of the coverage of the Treasury's plan to overhaul the financial regulatory system. This past weekend the Treasury announced a plan to overhaul the nation's financial regulatory apparatus. Among many sweeping proposals is one that would eliminate bodies like the SEC and give more oversight responsibility to the Federal Reserve. Here is what the Treasury sees as a new role for the Fed...

From the standpoint of the financial markets, the key aspect of Paulson's proposed "Blueprint for Regulatory Reform" was to give the Federal Reserve the oversight of "market stability." As part of that, the Fed would extend its charge from commercial banks to investment-banking firms and other non-traditional market players, including hedge funds and private-equity firms, which had been little regulated, if at all, but capable of creating risks for the entire financial system.

Now, I am one that believes that the Fed has enough power as it is. Let's look at what the Fed can do already. They singularly control the prime rate which is a pre cursor to all sorts of other interest rates. It also manages the money supply by controlling billions of dollars worth of U.S. Treasuries. Finally, the Fed has oversight responsibility over banks. Now, the Treasury wants to expand its oversight responsibility to the financial industry in general.



We already saw the Fed play investment banker in procuring the buyout of Bear Stearns. Now, the Treasury dept wants to give the Fed nearly unlimited power over the entire financial industry. Let's examine the language used again.

the key aspect of Paulson's proposed "Blueprint for Regulatory Reform" was to give the Federal Reserve the oversight of "market stability." As part of that, the Fed would extend its charge from commercial banks to investment-banking firms and other non-traditional market players,

The Treasury wants to give the Fed "oversight of market stability" over just about anything that sniffs of a company involved in financial transactions. The term "market stability" is so nebulous that it can mean anything, and it would eventually lead a fed chairman that sees the role liberally enough to take license to do anything they please in the name of "market stability".

The Treasury is trying to calm the nerves of the public by having the Fed swoop in to save the day, however they will allow the Fed to swoop in anywhere anytime throughout the financial world and do what it pleases by doing so.