Mark Winston Griffith

Paulson Hints at the Future of Bank Regulation

If the Bush administration can be accused of allowing homeowners with subprime loans who are facing foreclosure to twist in the wind, the same can not be said of Treasury Secretary Paulson and Federal Chariman Bernanke's handling of the capital markets that fueled the subprime loan crisis in the first place. The Fed and the Bush Administration's series of recent bailouts demonstrated that they are willing to assume the role of divine interventionalists, at least for giant financial institutions and their rich customers.

Perhaps the only encouraging news to come out of the last two weeks is Paulson's recent declaration that perhaps investment banks, hedge funds and other financial institutions should be regulated. Unlike commercial banks which take in deposits, are federally insured, and are held to a certain level of scrutiny and restrictions, investment banks are pretty much allowed to roam freely through the financial markets. But at the point investment banks like Bear Sterns were kept from going under and securities firms started receiving back up from tax payers in the form of direct lending and guarantees from the Federal Reserve, the rules of the game changed.

With public assistance comes accountability and transparency. Right? At the risk of getting carried away, Paulson's words could be the first sign that investment banks may one day have their financial transactions reviewed and held to higher standards in the marketplace.

Perhaps the most important part of idea of investment bank regulation is the recognition that the financial world has changed. Commercial banks are just one part of a complicated financial system that tax payers are both deeply affected by and ultimately responsible for.

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Posted at 8:30 AM, Mar 28, 2008 in Economy
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