Wall Street and Washington’s overriding goal in restructuring the U.S. financial system should be to ensure that taxpayers never have to rescue a failing financial institution again, and the only way to accomplish that is to reign in all “potentially risky activities,” writes former U.S. Treasury Secretary Hank Paulson.
“The debate recently has centered on big banks and trading risks," Paulson says.
"I agree that big banks do pose a dangerously large risk to our financial system, and I am troubled that concentration in the industry has only increased since the crisis,” writes Paulson in an opinion piece in The New York Times.
“We need broad-based reform that covers all types of financial institutions and all forms of potentially risky activities.”
Accordingly, the Obama administration’s proposal to bar big banks from trading driven by other than customer-related activity does not go far enough, Paulson insists, as it would not have prevented the collapse of American International Group, Fannie Mae, Freddie Mac, Lehman Brothers, and others.
“Rather than dictating a set of rules that will become out of date as the markets evolve, policy makers should devise legislation that ensures that regulators have the authority to tackle the issue of size and all potential systemic risks,” writes Paulson.
The first step must be to create a systemic risk regulator to monitor the stability of the markets and to restrain or end any activity at any financial firm that threatens the broader market.
The next step is that the government must have the power to impose an orderly liquidation on any failing firm.
“These two reforms will enable the regulatory system to better prevent the kinds of excesses that fueled our recent crisis, restore market discipline and keep the failure of a large institution from bringing down the rest of the system,” writes Paulson.
One thing that may stop this from happening, however, is criticism from the right.
President Barack Obama has responded to critiques of his economic policies by insisting, according to The Washington Post, that he is a “fierce” advocate for free markets.
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