As Shakespeare said, "We must take the current when it serves." Treasury Secretary Henry Paulson may have had a touch of the Elizabethan flu as he took advantage of the intense focus on all things financial to unveil a range of recommendations to overhaul the regulation of U.S. financial markets.
Three Cheers for Paulson's Plan
By Paul R. La Monica, CNNMoney.com
Markets responded positively Monday and there's been a great deal of reaction to the announcement. As mentioned in our 03/28/08 story, "Goldilocks Government," governments have attempted to fine-tune economic markets for centuries—usually with unintended negative consequences. So why the cheery response? Paulson's selling the plan as a streamlining of regulatory burdens. Should we be going all Falstaff and knocking back some mead? (Yes, we realize we're mixing our Shakespearean metaphors.) Nah. Though we see Paulson's recommendations as mostly fairly rational, it's way too early to jump to conclusions.
Part of the positive reaction could be tied to the fact this plan might distract legislators. Debating this plan could forestall some of the more rash, short-term measures that have been kicked around of late—and that in itself is indeed a positive. And Paulson's plan is no knee-jerk reaction. It's been long in the works—for almost a year—long before liquidity fears made constant front page headlines.
The plan itself is a bit of a mixed bag. Though in general we're leery of regulatory "overhaul" (backwards talk for "lots of new regulation"), some of our existing regulation is, in fact, quite rickety—designed during a different time when people and institutions just banked and invested differently. (When the Fed was formed in 1913, folks certainly didn't fathom a world where the Fed would lend directly to investment banks.) The plan, as it stands, proposes combining some regulatory agencies to reduce redundancies and conflicts of interest among regulators—streamlining is fine. But it does call for the formation of some new bodies and increased oversight from the Fed—particularly of investment banks and brokers—and we always fear the unintended consequences that can follow.
But a major overhaul needn't mean sure disaster. The UK went through a major overhaul of their regulatory system in 2001—a move we view as having generally positive results. (Note: Their overhaul gave them one regulatory body—which is not something Paulson recommends for the United States, though his proposed plan could move us towards a leaner, trimmer regulatory system.) And though the UK's overhaul has generally gone smoothly, it did not prevent the run on Northern Rock or its subsequent nationalization. No amount of regulation, no matter how fine-tuned, can prevent future mishaps—that's the nature of free markets.
Despite Paulson's attempt to take the current, it's unlikely much of his plan survives intact. First, for all their rhetoric this year, we know politicians haven't been much interested in agreeing on any material new legislation. Second, should an overhaul get approved, it will go through political twisting and turning. Further, Congress has already voiced opposition to much of the plan. (That alone makes us view the plan with a slightly more accommodating eye. If Congress feels they are losing some oversight, so much the better.)
In other words, the plan could look vastly different once approved—if approved at all. Though markets cheered Monday, how they'll later respond in the harsh light of day is anybody's guess. In general, we're fine with the removal of regulatory stumbling blocks and would like to see those recommendations survive, though we don't have a way to handicap that likelihood. For now, we remain watchful. Like Caesar should have been! See, we knew we'd get back to Shakespeare and Rome somehow.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.