January 13, 2013
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April 1, 2008

Doing Something About the Financial Mess

By Christopher Chantrill
The Bush administration launched another plan Monday to Do Something about the mortgage mess.  In a major speech Treasury Secretary Hank Paulson proposed a Blueprint for a Modernized Financial Regulatory Structure.

This is Part Three of the Bush administration's plan to Do Something.

Part One is to have the Federal Reserve System print lots of lovely money. 

Part Two is the plan to have the United States Treasury drop millions of tax rebate checks out of helicopters. 

Part Three, the one just announced, is a plan to play musical chairs with the federal agencies charged with financial regulation.  For starters, the Securities and Exchange Commission will be merged with the Commodity Futures Trading Commission. 

Predictably, the New York Times views the proposed changes as a relaxation of regulatory standards and a cave-in to laissez-faire.  In a news analysis article Nelson D. Schwartz and Floyd Norris call the Treasury's Bluleprint a "reluctant eye on Wall Street."

This reluctant action is a plan that, according to Damian Paletta and Kara Scannell at The Wall Street Journal, gives broad new powers to the Federal Reserve System.

The Federal Reserve could emerge with significantly enhanced powers to oversee financial markets. Mr. Paulson is expected to recommend that the central bank play a greater role as a "market stability regulator," with broader authority over all financial market participants.

Apart from the Fed's new role as as a broad "market stability regulator" the plan would create two new regulatory bodies, a

Prudential Financial Regulatory Agency, would oversee the financial regulation of the insurance and federally insured banks. Another regulator, the Business Regulatory Agency, would oversee business conduct at all the companies.

Also included in the reluctant reform is a new agency to oversee the mortgage industry.

Mr. Paulson plans to call for the creation of a new entity, called the Mortgage Origination Commission, according to an outline of the Treasury Department's plan, which was first reported by the New York Times. This new entity would create licensing standards for state mortgage companies. This commission, which would include representatives from the Fed and other agencies, would scrutinize the way states oversee mortgage origination.

After Part Three of the Bush administration's plan there is still Part Four, the plan from committee chairmen Senator Christopher Dodd (D-CT) and Rep. Barney Frank (D-MA) to assist Democratic voters with a Super FHA.  Under their plan to assist distressed homeowners, reported by The Politico,

lenders would agree to write down a homeowner's existing mortgage balance. In exchange, the FHA would insure a new 30-year, fixed rate loan with an FHA-approved lender and the original mortgage holder could walk away.

There is a common thread to all these government actions.  All of them fail to think seriously about how we got here, and how the major political and economic actors contributed to the mess.  Like me, you might want some answers to the following questions about the current mortgage mess:

  • 1. How much of the problem originates with the Federal Reserve System? The Fed is always in fighting mode. Either it is fighting recession, as now, or it is fighting inflation, as it was until the credit crunch started last summer. Wouldn't it be better to leave all this fighting to the armed forces? Isn't it time to have a national conversation about the Fed, given that the dollar is worth about 5 percent of its value when the Fed took charge of the nation's monetary policy back in 1913?
  • 2. How much of the problem originates with the government's many programs to subsidize homeownership? We get to deduct mortgage interest payments on our income tax returns and we have the FHA, Fannie Mae, Ginnie Mae, Freddie Mac all in the business of hosing down the American people with mortgage money. Is this really such a good idea?
  • 3. What about the high octane use of debt? Unlike Warren Buffet, we don't have to believe that "derivatives are financial weapons of mass destruction." But all credit crises involve overleveraged debtors who suddenly find themselves "under water" and unable to service their debt. It happens time after time. What is going on here?
  • 4. Can the solution to the current market volatility really be a plodding expansion of government regulatory powers and more rule by the bureaucrats?
Maybe the problem with the financial system is the central role that government plays, especially given its role as the No. 1 debtor.  Maybe there's another way. 

Last week David Brooks advertised the efforts of a new generation of "social entrepreneurs" and their philosophy for solving social problems.

The older do-gooders had a certain policy model: government identifies a problem. Really smart people design a program. A cabinet department in a big building administers it.

But the new do-gooders have... a much more decentralized worldview. They don't believe government on its own can be innovative. A thousand different private groups have to try new things. Then we measure to see what works.

We conservatives know where that comes from.  It comes from F.A. Hayek, Nobel laureate and conservative god. 

There must be a decentralized, Hayekian way to build a financial system that is not based on government debt.  But who will lead the way?


Christopher Chantrill is a frequent contributor to American Thinker. See his roadtothemiddleclass.com and usgovernmentspending.com.  His Road to the Middle Class is forthcoming.

on "Doing Something About the Financial Mess"