Treasury Secretary Henry Paulson’s proposed plan to overhaul the financial system would include increasing the Fed’s powers. While saying that further regulation is not the answer, Paulson sent mixed signals by expanding the Federal Reserve’s powers to include regulating non-traditional banks – such as investment banks – and creating new bodies to regulate the mortgage industry. The timing of the new plan is interesting considering the Fed’s recent bailout of Bear Stearns – an investment bank. This bailout sent up a potentially troubling signal – large financial institutions have little disincentive to steer clear of risky investments, knowing that if they get into too much trouble, the government will be there to offer liquidity.
Tighter mortgage regulation may ultimately be in the best interest for home buyers, especially if regulators crack down on unscrupulous lenders or mortgage brokers who get borrowers into loans that are not in their best interests. In the short term, however, this may make the credit markets even more restrictive and ultimately drag out the housing crisis. Rates are at multi-year lows for mortgages and home loans, but lenders have become much more selective about who gets those loans, and many consumers are not seeing these low rates quoted. Down the road, this reform will not only be better for the consumer, but may ultimately save banks from themselves and ensure that loan portfolios are much more sound.
Incorporating the CFTC into the SEC has been something that the government has wanted to do for some time, but up to now it has had little luck in persuading the CFTC to cave in and essentially fire itself. A merger between the two regulating bodies would benefit clients of optionsXpress and similar firms by opening up the cross-margining of equities and derivatives. This would allow customers that have reduced their risk exposure by hedging to have more free capital to use on new investments. Also, fewer regulatory hurdles would likely encourage exchanges to create new financial instruments.
While Mr. Paulson’s plan aims to streamline financial regulators to make them better able to adapt to financial crises, it looks as though it would simply change nameplates and have very little impact on consumers. The plan may help prevent a credit crunch in the future, but offers no plans to help the current situation. It is also likely that the stronger points of the plan will be watered down when Congress gets through with them. The Federal Reserve has already flexed its muscles and expanded its roll in the financial markets recently, not only with the bailout of Bear Sterns but by working with other central banks to help soften the blow of the subprime bailout. Better regulation of lending practices and consolidation of equity and commodity regulators will ultimately benefit consumers if put into place, but the rest of the financial regulation may not hit its intended mark.
Rob Kurzatkowski, Commodity Analyst