Asthe world of finance becomes ever more complicated, American capitalism seems to need the ever stronger presence of a super-regulator, one of almost Leviathan proportions, to maintain the promise of stability. So, even if the US credit market?s substratum was partially weakened by the liquidity gush in monetary policy?s own firefighting burst of heroism around six years ago, it is the current need for supreme assurance that seems to have motivated US treasury secretary Henry Paulson?s overhaul of the financial sector?s regulatory framework in America. It is the most momentous such change since the Great Depression, and if the aforementioned need is indeed what is being addressed, then free market principles may have to defer to it. To keep loans from being made to the unworthy, Paulson proposes a federal mortgage origination commission to oversee state-level oversight of such lending. To keep better watch on derivatives, the Securities & Exchange Commission, the stockmarket regulator, is to merge with the Commodity Futures Trading Commission. And, the key change, the Federal Reserve is to be empowered in new ways to play the role of market stabiliser-in-chief, with investment banks, hedge funds, private equity firms and other financial players to come under its scrutiny?or worse ? if they happen to threaten the financial system with their dealings.
The Fed, the monetary authority which until recently argued that keeping even asset bubbles from inflating would be an arbitrary overstretch of its job definition, is certainly the best equipped in terms of information to monitor the financial sector. But implementation will be tough. Questions will arise over the tools placed at its disposal to act, and how its actions could possibly be assessed for objectivity. In a free market environment in which runaway stock prices can justifiably only be talked down (?irrational exuberance?) by the Fed, how much intervention would financial markets brook before they erupt in howls of protest? Modern financial products are much too complex for easy judgement calls by market players, let alone state regulators. Worse, poorly devised clamps could end up suffocating markets. But then again, maybe a financial sector gone wild needs the knowledge that someone is watching?that a master-regulator exists.
