Secretary of the Treasury Henry M. Paulson, Jr. recently released the "Blueprint for a Modernized Financial Regulatory Structure," the Department of the Treasury's plan to overhaul America's financial system in the wake of the housing crisis and the Wall Street meltdown. Commentators are touting the changes as the most sweeping reforms since those implemented by President Franklin D. Roosevelt during the Great Depression.
In his speech announcing the "Blueprint," Secretary Paulson stated that "the challenge is to evolve to a more flexible, efficient and effective regulatory framework." Among the short-term changes proposed is the creation of a new Mortgage Origination Commission designed to regulate the mortgage industry by evaluating each state's regulation of lenders and brokers. The report asserts that Federal legislation should establish uniform minimum qualifications for state licensing of lenders and brokers and that the Federal Reserve should implement national mortgage-lending laws. Over the long-term Secretary Paulson wants to eliminate some of the duplication currently in the system. To do so he proposes merging the Securities and Exchange Commission, which oversees the financial markets and is responsible for protecting investors, with the Commodity Futures and Trading Commission, which regulates the trading of futures contracts of oil, gold and wheat. He also would merge the Office of Thrift Supervision with the Office of the Comptroller of the Currency so that the latter would regulate both national banks and financial institutions that operate like banks.
While I am not an economist, streamlining bureaucracy to reduce duplication and waste is generally a good idea, particularly if the separate bureaucracies govern similar institutions or trades. Where there should be more cause for concern is with a reactive or impulsive desire to over-regulate the industry. Secretary Paulson has said he wants to avoid this, but suggesting that the Federal Reserve issue national mortgage-lending laws without stating specifically what those laws should entail and what should be the limit of the Federal Reserve's power to tamper with the housing market is rather troubling.
There is a tendency in times of financial crisis to look to government as the solution. Yet government solutions often exacerbate the problem or permanently limit the free market. What should occur in this housing crisis is a market correction. In other words, the Federal Government should let home prices, which were inflated grossly, correct themselves to more realistic values.
Some economists also have criticized the Federal Reserve for lowering interest rates so much that inflation may become a serious problem. If this proves to be the case and the Federal Reserve has over-reacted to the crisis by lowering interest rates excessively, it would provide further proof that too much regulatory power should not be vested in one bureaucracy.
A free market is notoriously difficult to manage and predict because so many different forces govern it. Yet it has proven to bring the greatest wealth to the most people of any economic system in history. Certainly some regulation is needed to govern the human propensity toward sin and greed. But too much regulation will move us toward a statist economy. If this happens, the American entrepreneurial spirit may be stifled in a bureaucratic and legislative quagmire while real wages decline. And countless historical examples have shown that, if left to itself, the market does a much better job of correcting itself than bureaucrats who try to micro-manage prices, coinage, interest rates or wages. On this subject the words of John Lennon and Paul McCartney may provide more guidance than reams of Federal Reserve legislation, "Let it be."