Mr. Paulson's Starting Point

Mr. Paulson's Starting Point
It's not so far from Barack Obama's.

Wednesday, April 2, 2008; A18

THE FOLLOWING quotation from a recent speech neatly summarizes Treasury Secretary Henry M. Paulson Jr.'s rationale for overhauling federal financial regulation: "We need to streamline a framework of overlapping and competing regulatory agencies. Reshuffling bureaucracies should not be an end in itself. But the large, complex institutions that dominate the financial landscape do not fit into the categories created decades ago." Surprise! These lines were actually spoken by Democratic presidential contender Sen. Barack Obama, several days before Mr. Paulson unveiled his plan. Mr. Obama went on to anticipate Mr. Paulson by urging that we "need to regulate institutions for what they do, not what they are," and by calling for a new federal body to track "systemic risks" across financial sectors.

The point of our belated April Fools' gag is not to endorse the particulars of any plan, whether proposed by Mr. Paulson, Mr. Obama or the other two presidential candidates, Democratic Sen. Hillary Rodham Clinton and Republican Sen. John McCain, who have also offered ideas. It is simply to suggest that, notwithstanding the predictable carping from interest groups and existing regulatory agencies, the country's creaky financial oversight system is a widespread concern, about which the two parties do not entirely disagree. And Mr. Paulson deserves some credit for making a particularly detailed contribution to a much-needed discussion.

Probably the strongest, and most politically feasible, of Mr. Paulson's ideas is to establish a federal mortgage origination commission, which would set minimum licensing criteria for mortgage lenders and grade the states' performance in enforcing their own regulations. His idea of offering big insurance companies a national charter, making them no longer subject to 50 different state regulators, might improve efficiency. Beyond that, Mr. Paulson's blueprint begins to get more debatable: Merging the Commodity Futures Trading Commission and the Securities and Exchange Commission would consolidate regulation of increasingly similar businesses; it might, however, prove difficult to mesh the CFTC's looser "principles-based" regulatory style with the SEC's more enforcement-oriented approach.

Mr. Paulson suggests making the Federal Reserve Board the new national lookout for "systemic risk." The question is what the Fed could do once it spotted an iceberg on the financial horizon. In fact, by consolidating bank regulation in a separate agency, Mr. Paulson's plan seems to decrease the Fed's authority. And note that the Fed has not made impressive use of the powers it already has; it resisted repeated calls to tighten regulation of subprime lending until it was too late.

Mr. Paulson himself acknowledged the awkward timing of his pitch, saying that it was neither necessary, nor necessarily desirable, for Congress to act in an election year -- lawmakers already have their hands full with foreclosures and other issues. The secretary's concession lent his entire proposal a certain academic quality. But it would be a mistake to dismiss it for that or any other reason. Ideas, even imperfect ones, are the necessary prelude to legislative action.