Treasury Secretary Henry Paulson yesterday flatly denied suggestions that the US government has embraced a greater role for the state in overseeing financial markets, in the wake of sweeping new proposals to overhaul the financial regulatory system.
“You will not see me or the Bush administration calling for more government intervention,” Paulson told Emerging Markets at a press briefing.
“In terms of government intervention and the housing and capital markets I have not seen a number of proposals calling
for [intervention] that would not do more harm than good.” Paulson’s comments come just a week after he submitted a plan for financial regulatory reform that analysts say is among the most dramatic since the Great Depression. The Treasury’s financial regulatory blueprint is aimed at updating antiquated regulation to cope with complex new financial products.
His explanation also follows a government-brokered $29 billion bail out of teetering investment bank Bear Stearns last month – one of the largest such moves in US financial history. Analysts have pointed out that both episodes represent a philosophical sea change for an administration that has long claimed that regulation should be guided principally by markets.
In an interview with Emerging Markets this weekend House Financial Services Committee chairman Barney Frank recalled that “free market fundamentalists” in the administration had previously blocked calls for regulatory reform that would have stepped up oversight of financial markets.
He also pointed out that until recently administration officials were warning that the United States needed to loosen financial regulations to court more investment. Added Frank: “We’re beyond that now.” But Paulson made clear the Bush administration will resist calls for deeper state involvement. “This is legislation for stronger oversight. Don’t confuse what you may read. US policy is not for intervention.”
He pointed out that his reform proposals are a longer-term proposition and, moreover, that the Treasury is currently centered on minimizing collateral damage. “Our first and biggest focus today is getting through this period with as little impact as possible on the real economy,” Paulson said. “The next focus is what you can do to avoid having this occur.”
Regulatory reforms launched several weeks ago would set parameters for rating agencies, securitization and over-the-counter derivatives.
Additional reforms will be announced at a G7 finance ministers meeting at the end of the week, when the Financial Stability Forum is set to report to the industrialized economies. Paulson stressed that the recent reforms proposed by the Treasury were a long time coming, and will similarly take time to complete.
“The regulatory reforms I put forward last week are the result of a project begun before we had turmoil,” he said. “This turmoil will be resolved well before those actions need to be taken. His view chimed with that of Congressman Frank, who said this weekend that hearings won’t be held on the reforms until next year.
The Treasury Secretary played down fears among policy makers and financiers – including those in emerging economies – that a financial pandemic may have been unleashed by the US meltdown. “There is no doubt our economy slowed dramatically, and we’re focused on it. There are risks on the downside to housing and capital markets.” But he said the US government is on the right course, and is implementing a number of programs “to prevent avoidable foreclosures.” He said that defaults represent only 2% of all mortgages.
“In capital markets, we are making progress, it’s not over yet, there will still be some bumps in the road, markets are repricing risk,” the Treasury Secretary said. To head off a slowdown in credit activity, Paulson favours keeping banks liquid. With banks, “our big focus is to encourage them so if they need equity, they raise equity; the alternative of shrinking balance sheets is not good for the economy,” he said.