FacebookTwitterRedditEmail

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.

 

 

 

 

More articles by:

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.

Weekend Edition
July 03, 2020
Friday - Sunday
Peter Linebaugh
Police and the Wealth of Nations: Déjà Vu or Unfinished Business?
Rob Urie
Class, Race and Power
John Davis
A Requiem for George Floyd
Jeffrey St. Clair
Roaming Charges: Mutiny of the Bounties!
Richard D. Wolff
Revolutionary Possibilities: Could U.S. Capitalism Turn Nationalist?
Richard Falk
When Rogue States Sanction the International Criminal Court
Louis Proyect
Smearing Black Lives Matter…From the Left
Ralph Nader
Trump and Pence – Step Aside for Professional Pandemic Scientists and Managers
Ramzy Baroud
Tearing Down the Idols of Colonialism: Why Tunisia, Africa Must Demand French Apology
Philippe Marlière
Challenging the French Republic’s Color-Blindness
Richard C. Gross
Attack, Deny
Lee Camp
Connecting the Dates – US Media Used To Stop The ‘Threat’ of Peace
Steve Martinot
The Desire to Kill
David Yearsley
The War on Kitsch
Amy Eva Alberts Warren – Rev. William Alberts
Why are Certain Christians Democratic and Others Authoritarian?
Lawrence Davidson
Covid Madness
Brian Cloughley
Britain’s Disorder and Decline
Ellen Taylor
The US Military Has Its Knee on the Throat of the World
David Rosen
White Nationalists on the Attack
Jeff Cohen
Politicians of Color Should Not be Immune From Criticism
Joseph Natoli
Drawn Away from Reality in Plain View
Frank Joyce
Give Me Liberty,  Give You Death
Jonah Raskin
My Adventures in the Matriarchy
Kollibri terre Sonnenblume
The Corruption of the Democratic Party: Talking to Ted Rall about his new book
Medea Benjamin - Nicolas J. S. Davies
Trump’s Record on Foreign Policy: Lost Wars, New Conflicts and Broken Promises
Paul Edwards
A Bridge Too Far
Arshad Khan
India and China Tussle on the Roof of the World
Jennifer Joan Thompson
How to Do Things With Theses: Chile’s National Police Force Sues the Feminist Artistic Collective, Las Tesis
Shawn Fremstad
Vacations for All!
Thomas Knapp
A Modest Proposal for Compromise on “Confederate” Military Bases
Vijay Prashad, Eduardo Viloria Daboín, Ana Maldonado, and Zoe PC
Venezuela’s Borderlands Have Been Assaulted by COVID-19
Thom Hartmann
COVID Masks: The Latest Faux Conservative Outrage
Jesse Jackson
Mandatory College Football Practices in Time of Pandemic are Nuts
Nicholas Vincenzo Barney
Consensus Politics on the Fringe: The Intellectual Dishonesty of the Intellectual Dark Web
Ted Rall
The Data is Clear: Progressives Should Boycott Biden
Joshua Tartakovsky
Sergei Khrushchev: An Eulogy from His Close Student
Theresa Church
In Reconsidering ‘Normalcy’ Genetically Engineered Trees Do Not Belong
Chelsea Carrick
Let’s Not Lose Momentum
Adam Rissien
Sorry Secretary Perdue, Our National Forests are Not Crops
Paul Gilk
A Few Theoretical Percentages
Thomas S. Harrington
“New Corona Cases”:  A Phrase That’s Tells us Very Little, if Anything,  About the Actual Levels of Danger We  Face
Claire Chadwick
I Got COVID-19 at Work. I Won’t be the Last
George Wuerthner
The Upper Green River Should be a National Park, Not a Feedlot
Julian Vigo
Profiteering in the Era of COVID-19
Ravi Mangla
Policing is Not a Public Good
FacebookTwitterRedditEmail