Treasury Secretary Henry Paulson wants to consolidate the nation’s financial regulators into a tripartite gang that can save the economy from distress and doom. The plan to give the Federal Reserve broad new regulatory powers and streamline the regulatory community has been in the works since last March, before the start of the subprime meltdown. Paulson is worried that the U.S. markets are no longer competitive with maturing world markets, some of which aren’t hampered by nuisances like regulation. After the jump we’ll explain the consumer impact of the plan and introduce you to your three new regulators.
This plan would consolidate a large number of regulators into roughly three big new agencies.
Bank supervision, now divided among five federal agencies, would be led by a Prudential Financial Regulator, which could send examiners into any bank or depository institution that is protected by either federal deposit insurance or other federal backstops. It would eliminate the distinction between “banks” and “thrift institutions,” which are already indistinguishable to most consumers, and shut down the Office of Thrift Supervision.
Any effort to merge the Commodity Futures Trading Commission with the S.E.C. is likely to provoke battles.
Yet another proposal would, for the first time, create a national regulator for insurance companies, an industry that state governments now oversee.
Administration officials argue that a national system would eliminate the inefficiencies of having 50 different state regulators, who have jealously guarded their powers and are likely to fight any federal encroachment.
The media is tripping over themselves to report the expansion of the Fed’s role, but consumers should care about other parts of the plan.
The federal insurance proposal is a huge giveaway for the insurance industry. Insurers would be able to evade strong consumer protections at the state level by opting-in to what would be comparably lax regulation from the Treasury Department. If approved, it is not unreasonable to expect higher rates and fewer protections.
The new Prudential Financial Regulator, which would gobble up the five regulators that currently oversee banks and creditors, could severely harm consumers. We don’t yet know who would steer the massive new regulator, or whether they would emulate the destructive model of the Office of the Comptroller of the Currency, which preempts state authority and then sits idly by as consumers are financially raped.
So what is the media focusing on?
Paulson couldn’t just ignore the subprime meltdown, so he is proposing a Mortgage Origination Commission, which would set baseline qualifications for mortgage brokers and chastise states for failing to adequately regulate the industry.
The plan also calls for broad new authorities for the Fed to oversee the market, “in effect allowing it to send SWAT teams into any corner of the industry or any institution that might pose a risk to the overall system.” The proposal would standardize emergency borrowing from the Fed’s discount window. In exchange for allowing non-bank failures to sally up to the window and beg for cash, the Fed will claim the ability to thumb through their books and balance sheets “in order to protect the Federal Reserve (and thereby the taxpayer).”
It is doubtful the plan will become law this year, but is an important vehicle for framing the coming debate over regulatory authority. Congress is going to put its prints all over the plan before it passes. The devil is in the details and Congress must ensure that any new regulatory environment isn’t hostile to strong consumer protections.
After all, even the Treasury Secretary acknowledges that his proposal may not be enough to prevent the next subprime meltdown: “At a fundamental level, the root causes of market instability are difficult to predict, and past history may be a poor predictor of future episodes of instability.”