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Paulson’s Plan … Is a Distraction

By: Steve Johnson

4/1/2008 - 10 Comments

Treasury Secretary Henry Paulson proposed yesterday the biggest overhaul of U.S. financial rules since the Great Depression, saying the Federal Reserve should expand its oversight of financial services.

It’s a trick to try and boost consumer and foreign investor confidence. 

The current financial crisis is largely due to regulatory failures, not overregulation.  The plan suggests that our present regulatory framework is outdated, born out of the Depression-era events and is not well suited for today’s global environment, where billions of dollars can move across the globe very quickly.

Paulson wants the Federal Reserve to create a Mortgage Origination Commission to oversee and rate how states license and regulate lenders and create minimum qualification standards for licensing.

It’s a Distraction

The Fed is desperately creating daily distractions as they try to glue the financial system back together before the house of cards collapses. This plan will be debated in congress for years before anything changes. Perhaps the primary function of its introduction is to calm the financial markets and detract attention from the banks that are facing the biggest crisis in 30 years.

“Credit market turmoil poses the most severe crisis for banks in 30 years, surpassing Black Monday in 1987, the Asia currency crisis and the bursting of the dot-com bubble, Morgan Stanley and Oliver Wyman said in a joint report”  Reference Article: Banks Face Biggest Crisis in 30 Years, Report Shows

The banking industry is planning to lose some 200,000 jobs this year. Reference Article: Banking industry to lose 200,000 jobs

The Lack of Financial Education in America Is a National Liability

The public has been taken advantage of – and their lack of financial education has been exposed by the mortgage crisis. The government can no longer let people make mortgage decisions that put the financial markets at risk. The coming regulations will have to be very heavy in order to be sure a home owner knows what they are doing. One of the new requirements should be to complete a community education class on budgeting or money management before buying a house.

This plan is critical to convince foreign investors that we are correcting the problems so that they continue to invest in the US.  This is what the Fed means by "we have a strong dollar policy", while holding interest rates historically low.

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