Don’t discount Paulson

Treasury Secretary Henry M. Paulson Jr., a smart man, must have known all along that little would come of his plans to streamline and modernize oversight of the U.S. financial system during the 10 months remaining in President Bush’s term in office. Regulatory bodies that potentially would be “reformed” out of business, including state insurance regulators, are already fighting the 3-day-old proposal. Lobbyists for the banking and insurance industries, largely left out of the planning process, are too.

The proposal is also encountering pushback on Capitol Hill, where Congress, understandably, would prefer to focus on the sub-prime mortgage crisis -- a pressing problem -- than to engage in theoretical debates about long-term governance. A period of debilitating financial crisis, verging on recession, indeed seems like a crazy time to start talking about dismantling and reconstituting regulatory agencies (especially when those agencies’ hands-off approach arguably caused the crisis).

But reforming federal financial regulation, a 1930s-era patchwork of agencies with overlapping jurisdictions, is a good idea. And for Paulson to have waited until times were flush and no one was paying attention to bring up the subject would have been a surefire recipe for failure.

Moving forward, of course, will require Congress to evaluate the merits of the ideas in the 218-page proposal, on which Treasury officials worked for more than a year. An ideal regulatory system would organize oversight by function, making sure all dealers in securities, for example, were regulated uniformly (today, a bank that sells bonds is regulated differently than a brokerage that does). It also would empower an entity -- perhaps the Federal Reserve, perhaps some other body -- to act proactively and look out for the systemic forces that create dangerous economic bubbles (such as, in the case of the current mortgage crisis, the market’s failure to correctly price bond risk).

Congress should carefully consider Paulson’s Wall Street resume -- he’s a former chief executive of Goldman Sachs -- when it discusses financial regulation reform over the months to come. As the sub-prime meltdown has demonstrated so painfully, Wall Street’s interests often don’t align with Main Street’s. But legislators needn’t dismiss all of the secretary’s ideas outright. To the extent that Congress can use Paulson’s plan as a springboard to improving oversight, it -- and the lame-duck Treasury secretary -- will have done good work.