Washington, D.C., March 31, 2008—Treasury Secretary Henry Paulson today unveiled a plan for restructuring the federal role in regulating financial institutions. The blueprint contains good recommendations on eliminating excessive securities and insurance regulation, but the proposed “market stability” provisions would give the Federal Reserve Bank open-ended and unaccountable power over many types of American businesses, say Competitive Enterprise Institute financial experts John Berlau and Eli Lehrer.
“To propose, as the blueprint does, that the Fed can examine any business that poses a threat to the financial system, would result in an unacceptably broad jurisdiction,” says Berlau, director of CEI's Center for Entrepreneurship. “Many small entrepreneurs may suddenly find themselves at the Fed's mercy. Federal statutes and rules have already stretched the definition of ‘financial institution’ to include such diverse businesses as jewelry stores, car dealers, and travel agencies.”
Berlau says, however, that the report's recommendations on merging the Securities and Exchange Commission with the Commodity Futures Trading Commission deserve careful consideration. “The SEC, particularly with the advent of the Sarbanes-Oxley accounting mandates, investigates far too much minutiae that don't pose a systemic risk. Getting rid of this excess and redundancies with agencies like the CFTC would benefit entrepreneurs and investors.”
Lehrer, a CEI senior fellow who specializes in insurance analysis, praised the blueprint's call for optional federal charter for insurance companies who wish to forego state regulation. “For those who support a more open and creative insurance market, this report is a major step forward,” said Lehrer. “It's not perfect but, on insurance issues, it outlines a productive way forward.”
CEI will issue further statements as it studies the blueprint in the days ahead and will warn against a rush to overregulation. “Excessive and costly regulation of banks – from Sarbanes-Oxley to ‘suspicious activity’ reporting requirements – is one of the factors that led to so much securitization of loans to less regulated entities,” Berlau says “If we shower other financial institutions with expensive and intrusive new regulations, we can expect similar unintended consequences.”
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