31 March 2008

The Paulson Plan: a Foray into a Financial Iraq

We were asked if we favor the Paulson plan. After all, several noted academic economists have come out and spoken in favor of it. Wall Street complains that it will increase regulation and lessen their profits. Well, Wall Street complains all the time, but especially loudly when it has been caught with its hand in the cookie jar, and some economists will say just about anything for some of the cookie crumbs. The Banks protested the adoption of the Federal Reserve Act in 1913 in much the same manner, with false protestations while they privately were promoting it by incenting endorsements from economists and politicians.

Treasury Secretary Paulson softened his delivery this morning by couching the plan in terms of just 'a template' and a 'basis for discussion.'

Its important to realize that this study had its genesis in a Bush Administration effort to lighten regulation on Wall Street that has been underway for some time. The Bush cabinet is taking the opportunity of the Bear Stearns collapse to quickly bring this forward under the title "Financial Stability Act" in much the same way they were able to quickly bring out the "Patriot Act" after the 911 tragedy.

The next Presidential Administration will have to live with the problems created by eight years of Bush mismanagement. It would be better to leave sweeping changes to them, rather than follow yet another blank check proposal from a group in Washington that have proven over and over that they cannot, or will not, do what is required to act in the public interest.

When you have a massive failure in a critical system, you do not go to those on whose watch it occurred, with their proactive involvement, with strong elements of deception and fraud involved, with innocent people being victimized, and ask them what should be done to fix the system so it doesn't happen again.

We just have to ask how many times can someone lie to you, and cheat you, and take some of the goodness of life from you and your children, before you wise up and show them the door?

Not even a template. Not even a basis for discussion. No bonanza for the lobbying interests such as they had when the Banks went after the repeal of Glass-Steagall. And especially not something to distort and delay the real action that is required.

Are we in favor of this plan? No. Hell no.

It would be Congress and the president essentially giving a blank check to a regulator over which they have very little power,'' said Michael Greenberger, a professor at the University of Maryland in Baltimore and a former CFTC official. Paulson's proposal will ``allow Wall Street to do whatever they want until a crisis occurs, at which point the Fed would intervene.'' Bloomberg News

The Fed oversaw this meltdown,” said Michael Greenberger, a law professor at the University of Maryland who was a senior official of the Commodity Futures Trading Commission during the Clinton administration. “This is the equivalent of the builders of the Maginot line giving lessons on defense.”

"During the late 1990s, Wall Street fought bitterly against any attempt to regulate the emerging derivatives market, recalls Michael Greenberger, a former senior regulator at the Commodity Futures Trading Commission...“After that, all was forgotten,” says Mr. Greenberger, now a professor at the University of Maryland. "At the same time, derivatives were being praised as a boon that would make the economy more stable."

Speaking in Boca Raton, Fla., in March 1999, Alan Greenspan, then the Fed chairman, told the Futures Industry Association, a Wall Street trade group, that “these instruments enhance the ability to differentiate risk and allocate it to those investors most able and willing to take it.” Although Mr. Greenspan acknowledged that the “possibility of increased systemic risk does appear to be an issue that requires fuller understanding,” he argued that new regulations “would be a major mistake.”

“Regulatory risk measurement schemes,” he [Greenspan] added, “are simpler and much less accurate than banks’ risk measurement models."``

Mr. Greenberger, still concerned about regulatory battles he lost a decade ago, says that Mr. Greenspan “felt derivatives would spread the risk in the economy.”

“In reality,” Mr. Greenberger added, “it spread a virus through the economy because these products are so opaque and hard to value.” A representative for Mr. Greenspan said he was preparing to travel and could not comment."