Newspaper article The Christian Science Monitor

With Finance Crisis, Hands-Off Era Over

Newspaper article The Christian Science Monitor

With Finance Crisis, Hands-Off Era Over

Article excerpt

The great financial shakeout of 2008 - one of the most dire US fiscal crises of modern times - is likely to change permanently the relationship between Wall Street and Washington.

Already Treasury Secretary Henry Paulson has overshadowed New York's titans of finance with his decisions as to which institutions will get government aid and which will not. If things don't get worse, history may credit Mr. Paulson with helping to pull the economy back from the brink, as financier J.P. Morgan did in the Bankers' Panic of 1907.

Beyond that, a long period of Washington laissez faire toward financial markets may well be at an end. The details of regulation could be different, depending on which candidate wins the White House this fall. But more US oversight seems inevitable.

"We need to restructure the system to reduce the chance of having another crisis," says Douglas Elmendorf, a senior fellow in economic studies at the Brookings Institution.

Financial regulators may win access to more internal information from financial institutions, allowing them to better judge the risks they are running. They may also look for ways to control derivatives, financial instruments backed by mortgages or other types of assets, which have become complex "to the point of absurdity," in Mr. Elmendorf's words.

There's a sense that Washington needs to modernize a system of financial oversight rooted in government entities founded after the Great Depression.

"We have an archaic financial regulatory system ... it really needs to be rebuilt," Paulson told reporters at the White House on Sept. 15. The US needs a balance between regulation and market discipline, added Paulson, who last spring proposed a package of tougher regulations for investment banks, including giving more oversight powers to the Federal Reserve.

The crisis management of the Treasury Department and the Federal Reserve appeared to have stabilized markets, at least for the short term. Though the Dow Jones Index fell over 500 points on Sept. …

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