Tag Archives: bailout

Credit Market Meltdown – Will It Finally Bring About The DotCommers New Economy?

Are we seeing the credit markets and trust itself melting down, putting the entire global economy at risk?

 If banks won’t make loans, if they won’t issue letters of credit, how will the economy function? How will commerce take place without these fundamental components and tools of the trade that have enabled trade between parties who are generally unfamiliar with each other?

If the economy breaks down due to lack of trust, and the credit instruments in wide use cease to exist, does that mean we will have to rebuild the world economy and in doing so indeed finally have the “New Economy” as proclaimed, but never materialized, during the Dot Com era?

Is it possible that electronic transactions and the Internet play vital roles in actually solving the problem? Do we really need letters of credit to facilitate cross border transactions and shipment of goods or could the same type of third party escrow service Ebay buyers use come to the rescue?

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Henry Paulson’s Regulatory Blueprint for Wall Street

 Henry Paulson appeared on all four major Sunday news shows yesterday and repeatedly mentioned his regulatory blueprint.

Well, here is the recommendation section excerpted from the  212 page document:

VI. The Optimal Regulatory Structure

 

 

This chapter presents a conceptual model for an optimal regulatory structure. This model is intended to begin a discussion about rethinking the current regulatory structure and its goals. It is not intended to be viewed as altering regulatory authorities within the current regulatory framework.

 

 

Recommendation Overview
Treasury recommends a regulatory structure that recognizes the differences between business models centered on transactions with consumers (i.e., retail transactions) and those focused on transactions with other businesses (i.e., wholesale transactions). Strong arguments exist for distinguishing the regulation of businesses (or the portions of businesses) with explicit guarantees from the federal government (e.g., deposit insurance) from the regulation of those entities with no explicit guarantee from the federal government.

Treasury proposes a modernized regulatory structure that recognizes the convergence of the financial services industry. The proposed structure will be more efficient and strengthen our capital markets.

Treasury proposes the creation of three regulators focused exclusively on financial institutions and two other key authorities, a federal insurance guarantee corporation and a corporate finance regulator.

Each of these authorities is described below.

The market stability regulator should be  responsible for overall conditions of financial market stability that could impact the real economy. Given its traditional central bank role of promoting overall macroeconomic stability, the Federal Reserve should assume this role. A primary function of the Federal Reserve’s  market stability role should continue through traditional channels of implementing monetary policy and providing liquidity to the financial system. In addition, the Federal Reserve should be provided with a different, yet critically important regulatory role and broad powers focusing on the overall financial system. In terms of its recast regulatory role, the Federal Reserve should have specific authority regarding the collection of appropriate information from financial institutions, disclosing information, collaborating with other regulators on rulemaking, and taking corrective actions when necessary in the interest of overall financial market stability.

The prudential financial regulator should focus on financial institutions with some type of explicit government guarantees

 

associated with their business operations. Although protecting consumers and helping to maintain confidence in the financial system, explicit government guarantees often erode market discipline, creating the potential for moral hazard and a clear need for prudential regulation. Prudential regulation in this context should be applied to individual firms, and should operate like the current regulation of insured depository institutions, with capital adequacy requirements, investment limits, activity limits, and direct on-site risk management supervision. To perform this function, a new regulator, the Prudential Financial Regulatory Agency, should be established.

The business conduct regulator should be responsible for business conduct regulation across all types of financial firms. Business conduct regulation in this context includes key aspects of consumer protection such as disclosures, business practices, and chartering or licensing of certain types of financial firms. One agency responsible for all financial products should bring greater consistency to areas of business conduct regulation where overlapping requirements currently exist. The business conduct regulator’s chartering and licensing function focuses on providing standards for firms to be able to enter the financial services industry and market and sell their products and services to customers. To perform this function, a new regulator, the Conduct of Business Regulatory Agency, should be established.

The Federal Insurance Guarantee Corporation should function as an insurer for institutions regulated by the prudential financial regulator. The Federal Insurance Guarantee Corporation should possess the authority to set risk-based premiums, charge ex-post assessments, and act as a receiver for failed prudentially regulated institutions.

The corporate finance regulator should be responsible for general issues related to corporate oversight in public securities markets.

These responsibilities should include corporate disclosures, corporate governance, accounting and auditing oversight, and other similar issues. These responsibilities are not unique to financial institutions, but are broadly applicable across all publicly traded companies and publicly traded securities. The Securities and Exchange Commission would continue to perform this function in the optimal structure.