Treasury Secretary Henry M. Paulson Jr. yesterday proposed a massive regulatory overhaul of financial markets. But his plan offers no new controls to block the reckless trading and mortgage sales chicanery that led to the current housing crisis and the broader credit crunch that followed. Congress should reject the package and replace it with strong new federal controls for Wall Street and mortgage lending.
The Paulson plan would give the Federal Reserve Board broad responsibility to oversee the activities of investment banks like Bear Stearns but with permission to intervene only if major market turmoil appeared likely. That's not good enough. Investment banks deserve the same tough regulatory scrutiny as commercial banks because they now are favored with the same low-cost access to Fed loans.
Mr. Paulson is probably right when he says our aging regulatory system lacks the flexibility and expansive perspective needed to police the complex securities and fast moving markets of the 21st Century. But Washington regulators, including the Fed and the Securities and Exchange Commission, have been largely asleep at the switch in recent years as industry leaders and the Bush administration have pushed for less, not more, regulation.
The treasury secretary flatly asserts that the current market turmoil is not the fault of regulators. But he is wrong. During the Bush years, regulators promised that free markets would discipline themselves. The collapse of Bear Stearns and the Federal Reserve's subsequent rescue of the company's portfolio - at a likely cost to taxpayers in the billions - gives the lie to that arrogant assertion.
Meanwhile, Mr. Paulson has offered no significant help for thousands of homeowners now struggling to avoid foreclosure. Instead, he called for a national commission to assess how states might regulate the future packaging and sales of mortgages.
Democratic leaders in Congress are promising strong, new regulatory measures as well as aggressive assistance for victimized homeowners. With stubborn opposition from President Bush and conservatives in Congress, achieving real reform may depend on the election of a new president. But increasing regulatory oversight must be an urgent priority. Without it, the fallout from the next market scandal could be far worse.