The Federal Reserve’s intervention to save Bear Stearns looks worse as time passes. The Fed helped JPMorgan buy Bear Stearns. But then it started offering credit to other brokerage houses. If that was the right thing to do, shouldn’t the Fed have helped Bear Stearns directly? And if taxpayers are to be made liable for investment firms’ mistakes, shouldn’t those firms be more heavily regulated?
Treasury secretary Henry Paulson is trying to offer a coherent response to the question of what needs to be regulated, and how. His proposal has been on the drawing board for a year; it was not designed to address this month’s headlines. A good thing, too, since a proposal designed to chase the news would, in all likelihood, be an overreaction to that news. (See: Sarbanes-Oxley.)
Paulson would regulate less in some areas and more in others, always with a view toward modernizing a legal apparatus that largely dates from the 1930s. It calls for, among other things, more regulation of mortgage originators, which may be sensible in light of the experience of the last few years. (On the other hand, financial institutions will presumably no longer be as quick to buy packages of flaky mortgages from these originators, so the market may be fixing the problem.)
Some conservatives may balk at the way the plan treats insurance companies. It would allow them to choose to be regulated by the federal government rather than by states. This “optional federal charter” seems to us to be a wise attempt to free up interstate commerce. National companies shouldn’t have to comply with 50 sets of regulations. State regulators, and local insurance companies that do not want national competition, are already crying foul, which commends the proposal to us all the more.
Democrats say that the proposal is DOA on the Hill. Paulson concedes that our financial regulations cannot be overhauled in an election year. Modernization will be the work of future Congresses. By then, let’s hope, the present turmoil will be a faint memory.