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The far bigger problem of the last decade has been the
symbolic message Washington sent to the financial markets. On
the one hand, as the Born episode illustrates, the roaring
'90s ushered in a bipartisan belief that Wall Street could do
no wrong--that it was offensive to even consider substituting
the knowledge of small-minded bureaucrats for the towering
wisdom of traders and their abstruse risk models. At the same
time, the government signaled that when, by some freak
alignment of the stars, the traders erred and their models
broke down, Washington would be there to clean up the mess.
How else to interpret the Long-Term Capital bailout
scrupulously engineered by the New York Fed with the blessing
of Greenspan and the Treasury Department?
So it's curious, if not surprising, that Washington has
responded to the current crisis by doubling down on this same
message. The plan Treasury Secretary Henry Paulson announced
this week isn't a complete disaster. There are a handful of
worthy details--most notably the creation of a federal
Mortgage Origination Commission to develop minimum licensing
standards for mortgage lenders--that Congress should enact.
It's the broad thrust of Paulson's proposal that's utterly
mystifying: The Fed would receive enhanced authority to
intervene in the trading activities of investment banks--it
would formally gain the power to give Wall Street banks the
full Bear Stearns treatment. But that authority would only
relate to activities that posed "systemic risk"--which is to
say, the risk of a market meltdown. For activities that
didn't clear that threshold, the Paulson plan would actually
reduce federal oversight in some respects--for example, by
giving stock exchanges a larger role in regulating themselves
and expediting approval of new financial products.
