Plan Expands Government Role in Financial Markets

Treasury Secretary Henry Paulson on Monday unveils plans to expand the federal government's power over U.S. financial markets. It's being called one of the biggest overhauls of the regulatory system since the Great Depression. The plan comes in the middle of a credit crunch that may already have pushed the economy into a recession.

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RENEE MONTAGNE, host:

This is MORNING EDITION from NPR News. Good morning. I'm Renee Montagne.

STEVE INSKEEP, host:

And I'm Steve Inskeep. This is the day the Bush administration proposes to expand the federal government's power over the financial markets. It's being called one of the biggest overhauls of the regulatory system since the Depression. That's when the Fed expanded its authority over banks. Now the Fed may have more to say about other financial institutions. The plan comes in the middle of a credit crunch that may already have pushed this economy into a recession. NPR's Jim Zarroli is covering this story and joins us now. Jim, good morning.

JIM ZARROLI: Good morning.

INSKEEP: So what exactly will the Fed be able to do that it couldn't do last Friday?

ZARROLI: Well, we know a bit about what the Treasury Secretary Henry Paulson is going to say today. First, he's going to say that the Bush administration wants to merge or streamline some of the different federal agencies that now regulate different parts of the system. People would say that the financial markets have changed a lot. There's been a lot of blurring of lines between, you know, hedge funds and banks and investment banks, and we sort of just need to update the system to reflect that. The administration is also going to propose a sort of much enhanced role for the Federal Reserve as a kind of stabilizer. Right now, the Fed monitors commercial banks, and they'll be able to look into more institutions - hedge funds, for instance. They'll be able to look for risks, signs that these institutions are taking too many risks. This, of course, would help avoid the kind of situation we're in now, in which the financial system encouraged the use of a lot of these mortgage-backed securities that have caused so many problems.

INSKEEP: Just trying to understand this. Is the Fed basically saying, you know, we used to regulate banks, and banks used to be very separate from other financial institutions, but now everything is meshed together in ways that are very hard to understand, so we need a broader look at everything and we need regulatory agencies to be able to look more - in a more coordinated way at everything?

ZARROLI: Yes, I think that's what they're doing. And this was an effort that - we have to keep in mind that began before the current financial crises, there was pressure from Wall Street well before the mortgage problems happened to sort of lighten the regulatory load. A lot of people were saying the U.S. financial markets are falling behind the European financial markets. We need to do something to address that right now. And this effort that is culminating in the Bush administration's reform package really got under way a while ago in response to some of these changes that have taken place in the markets.

INSKEEP: Well, now, wait a minute. Are they going to lighten the regulatory load, or are they going to clamp down a little bit more tightly on what's going on?

ZARROLI: Well, it's interesting because, you know, as I say, this effort got under way some time ago. Now, of course, the political climate for financial reform has changed, you know, just 180 degrees. The Bush administration is really being pulled in two directions. You know, it has to do something to address this crisis, especially in an election year. There's a sense that the financial markets got into trouble simply because they weren't regulated enough. You know, they allowed the creation of all these complex debt products that led to the mortgage boom and bust. So the Bush administration really has to do two things here. It has to address that. It still faces pressure from Wall Street not, you know, not to go too far. You know, already, you're hearing people on Wall Street saying, you know, it's fine to streamline. It would be good to make the system be more efficient, but don't go too far.

INSKEEP: Very briefly, what's Congress saying about this?

ZARROLI: Well, reaction has been fairly positive from Democrats so far. Barney Frank, head of the House Financial Services Committee, says there have been differences between the White House and Congress about how far to go. This narrows the differences. Others have said, you know, kind of the same thing. This was Senator Bill Nelson of Florida on CNN yesterday.

Senator BILL NELSON (Democrat, Florida): The Bush administration is realizing that the private marketplace isn't going to handle this on its own. Paulson is calling for greater regulation. And if some of those regulatory agencies hadn't been asleep at the switch, we might not be in as bad a shape as we are now.

ZARROLI: And you're also hearing some other criticism from people saying, you know, this doesn't go far enough. Chris Dodd of Connecticut, Senator Dodd said that yesterday. He also said it would not address the current crisis, which definitely is true.

INSKEEP: Thanks, Jim. That's NPR's Jim Zarroli in New York.

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White House Proposes Financial-System Overhaul

Treasury Secretary Henry Paulson is proposing the most sweeping overhaul of regulations for the financial industry since the Great Depression, saying Monday that the measures are not meant to remedy immediate economic concerns.

Paulson said the proposal is an "aspirational model" for regulation, designed to be flexible, but that it should not be implemented until the difficulties are resolved.

"This blueprint addresses complex, long-term issues that should not be decided in the midst of stressful situations and should not be implemented to add greater burden to a market already under strain," Paulson said.

"These long-term ideas require thoughtful discussion and will not be resolved this month, or even this year."

The proposal gives the Federal Reserve new powers to act as a "market stability regulator," including authority to examine the books of any financial institution — not just banks — that might pose a threat to the stability of the financial system.

The rising tide of bad debt has made it harder for consumers and businesses to get credit and sparked fears of a recession, which many economists believe is already here.

Business groups are split on Paulson's newly recommended approach, and banking lobbyists are critical of some of the details affecting their industry.

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