Click amount to donate direct to CounterPunch
  • $25
  • $50
  • $100
  • $500
  • $other
  • use PayPal
Keep CounterPunch ad free. Support our annual fund drive today!

Why Paulson’s Plan Falls Short


The regulatory framework proposed by Treasury Secretary Henry Paulson will not address fundamental problems in the banking sector that contributed significantly to the recession and that must be fixed to rescue the U.S. economy from recession and avoid future crises.

The banks and securities companies, essentially, created overly complex and risky securities when bundling subprime mortgages and other loans into bonds. The banks became engaged in bogus, off books operations and credit default swaps that proved less than worthy. Ultimately, the value of these bonds collapsed, as investors could not adequately evaluate those bonds and discount for their risks.

Now fixed income investors no longer trust the credibility of the banks and securities companies, and these firms can no longer bundle mortgages, consumer loans and business loans into bonds, giving rise to the current credit shortage.

Even with a lower fed funds rate and beefed up access to the discount window, banks lack the credibility to raise funds in the fixed income market to make loans adequate to power the economy out of recession.

The regulatory reform and reorganization proposed by Secretary Paulson would enhance the Federal Reserve’s access to information about investment bank and securities companies activities, and subject many to stricter prudential financial standards; however, it does little to constrain the banks and securities from the kinds of abuses that gave rise to the current crisis. Nor does his plan provide adequate safeguard to avoid future credit crises and recessions from a recurrence of securitization abuses.

Further, Paulson’s plan does not address the problem of the bond rating agencies. Rating services are paid by the banks and securities companies to rate the bonds created by those companies. This has proven a flawed model that Paulson seems unwilling to address.

PETER MORICI is a professor at the University of Maryland School of Business and former chief economist at the U.S. International Trade Commission.





PETER MORICI is a professor at the Smith School of Business, University of Maryland School, and the former Chief Economist at the U.S. International Trade Commission.

More articles by:

2016 Fund Drive
Smart. Fierce. Uncompromised. Support CounterPunch Now!

  • cp-store
  • donate paypal

CounterPunch Magazine


Weekend Edition
October 21, 2016
Friday - Sunday
John Wight
Hillary Clinton and the Brutal Murder of Gaddafi
Diana Johnstone
Hillary Clinton’s Strategic Ambition in a Nutshell
Jeffrey St. Clair
Roaming Charges: Trump’s Naked and Hillary’s Dead
John W. Whitehead
American Psycho: Sex, Lies and Politics Add Up to a Terrifying Election Season
Stephen Cooper
Hell on Earth in Alabama: Inside Holman Prison
Patrick Cockburn
13 Years of War: Mosul’s Frightening and Uncertain Future
Rob Urie
Name the Dangerous Candidate
Pepe Escobar
The Aleppo / Mosul Riddle
David Rosen
The War on Drugs is a Racket
Sami Siegelbaum
Once More, the Value of the Humanities
Cathy Breen
“Today Is One of the Heaviest Days of My Life”
Neve Gordon
Israel’s Boycott Hypocrisy
Mark Hand
Of Pipelines and Protest Pens: When the Press Loses Its Shield
Victor Wallis
On the Stealing of U.S. Elections
Michael Hudson
The Return of the Repressed Critique of Rentiers: Veblen in the 21st century Rentier Capitalism
Brian Cloughley
Drumbeats of Anti-Russia Confrontation From Washington to London
Howard Lisnoff
Still Licking Our Wounds and Hoping for Change
Brian Gruber
Iraq: There Is No State
Peter Lee
Trump: We Wish the Problem Was Fascism
Stanley L. Cohen
Equality and Justice for All, It Seems, But Palestinians
Steve Early
In Bay Area Refinery Town: Berniecrats & Clintonites Clash Over Rent Control
Kristine Mattis
All Solutions are Inadequate: Why It Doesn’t Matter If Politicians Mention Climate Change
Peter Linebaugh
Ron Suny and the Marxist Commune: a Note
Andre Vltchek
Sudan, Africa and the Mosaic of Horrors
Keith Binkly
The Russians Have Been Hacking Us For Years, Why Is It a Crisis Now?
Jonathan Cook
Adam Curtis: Another Manager of Perceptions
Ted Dace
The Fall
Sheldon Richman
Come and See the Anarchy Inherent in the System
Susana Hurlich
Hurricane Matthew: an Overview of the Damages in Cuba
Dave Lindorff
Screwing With and Screwing the Elderly and Disabled
Chandra Muzaffar
Cuba: Rejecting Sanctions, Sending a Message
Dennis Kucinich
War or Peace?
Joseph Natoli
Seething Anger in the Post-2016 Election Season
Jack Rasmus
Behind The 3rd US Presidential Debate—What’s Coming in 2017
Ron Jacobs
A Theory of Despair?
Gilbert Mercier
Globalist Clinton: Clear and Present Danger to World Peace
James A Haught
Many Struggles Won Religious Freedom
Kollibri terre Sonnenblume
Dear Fellow Gen Xers: Let’s Step Aside for the Millennials
Uri Avnery
The Peres Funeral Ruckus
Tom Clifford
Duterte’s Gambit: the Philippines’s Pivot to China
Reyes Mata III
Scaling Camelot’s Walls: an Essay Regarding Donald Trump
Raouf Halaby
Away from the Fray: From Election Frenzy to an Interlude in Paradise
James McEnteer
Art of the Feel
David Yearsley
Trump and Hitchcock in the Age of Conspiracies
Charles R. Larson
Review: Sjón’s “Moonstone: the Boy Who Never Was”