Not a lot changed in the economic outlook this week, as the "r" word quickly becomes more and more part of the vernacular. Even Federal Reserve Chairman Ben Bernanke thinks it a possibility. On the employment front, payrolls contracted during the first quarter of this year, manufacturing and non-manufacturing activity fell again and auto sales posted their worst monthly reading in a decade.

However, the biggest news of the week came not from the data realm but instead from the "Blueprint" put forward by U.S. Treasury Secretary Henry Paulson. Check here for the full version of the plan (caution: large document). This plan seeks to rework the entire face of the U.S. financial system's regulatory structure. Having cut his teeth in the investment banking business (via Goldman Sachs), Secretary Paulson has shown a keen interest in changing the way Wall Street and the like are overseen by what he considers a hodgepodge of government agencies.

The administration's proposal has three broad objectives that would affect financial markets over the long haul. First of all, the Federal Reserve's banking regulatory duties would be traded out for keeping watch of the financial system's overall health – ranging from banks to insurance companies. Second, Mr. Paulson has proposed an entirely new agency that would roll the OCC (currency comptroller) and OTS (thrift supervision) into one. Finally, business conduct would come under the auspices of yet another new agency, focusing on issues of consumer protection. Obviously this is a huge goal to achieve since all three of these primary objectives are handled across an array of regulatory agencies, plus the whole issue of state-to-state differences in regulations only makes the task all the more complex.

As with any plans that call for big changes in the way the federal government conducts (or more aptly watches) business, plenty of opposition is already lined up against it. Check out these articles here and here (subscription required). In any case, the fact that we are in an election year, makes the likelihood of getting a huge piece of legislation such as this past Congress intact slim at best. Many observers expect that the final product of such a proposal that calls for sweeping regulatory transformation would take years to complete and likely would not resemble the original plan.


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