Former Treasury Secretary Hank Paulson has a somewhat battered reputation
for letting Lehman collapse while keeping Goldman Sachs afloat. But he's returning to the public forum, with a new book on the crisis
coming out, and a long-ish New York Times op-ed
Tuesday running under the headline "How to Watch the Banks."
Paulson doesn't think the financial reforms proposed by the Obama administration
will be effective. The latest one--"to bar big banks from trading
driven by other than customer-related
activity--would not have prevented the collapse of Fannie Mae, Freddie
Mac, Lehman Brothers, American International Group, Washington Mutual,
Wachovia or other institutions whose failure contributed to the
crisis," he argues. So what would prevent such a collapse?
Paulson advocates the creation of a "systemic risk regulator." He
thinks the Fed would be the best institution for the job, but also
thinks a council of regulators could work as long as it is "led by
either the Treasury secretary or the Fed chairman," and structured to
reach "strong decisions ... quickly."
Paulson's second recommendation is to give the government the
"resolution authority to impose an orderly liquidation on any failing
financial institution to minimize its impact on the rest of the
system." No bank, he says, is "too big to fail." He ends by emphasizing
the need for political courage, and, eventually, for reducing budget
deficits, "a big part of which will involve reforming our major
entitlement programs: Medicare, Medicaid and Social Security."
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