The Washington Post reports Thursday morning (“Paulson to Urge New Fed Powers,” p. D01) on Treasury Secretary Paulson’s call for expanded regulatory role for the Fed of the financial industry. Some excerpts:
“We should quickly consider how to appropriately give the Fed the authority to access necessary information from highly complex financial institutions and the responsibility to intervene in order to protect the system,” Paulson plans to say, “so they can carry out the role our nation has come to expect.” [...]
Paulson’s argument, which is shared by leaders of the Fed, is that even when the emergency Fed lending program for investment banks goes away — it is scheduled to expire in September, though the central bank could choose to extend it — financial players will assume they would be bailed out again in a crisis. That means they may be more willing to take risks that could threaten the financial system and thus require greater policing.
“We must limit the perception that some institutions are either too big to fail or too interconnected to fail,” Paulson is to say. “If we are to do that credibly, we must address the reality that some are.”
In truth, Paulson is recommending the Fed be allowed to intervene to minimize the effects of bad congressional regulation, as well as its own, of the financial sector. To buy such an argument, one must assume that market failure, and not doubling the MZM money supply in relatively short time periods, is the true cause of systemic risk in the economy.