Let's say – just hypothetically – that an industry vital to the
American economy was in serious jeopardy. When times were good, it
resisted regulation. Then optimism gave way to excess, which caused a
crisis, and the government had to step in. Regulation could have
prevented this crisis. But rather than propose better regulation, the
government actually proposed less.

Sounds crazy, huh? And yet that's exactly how the government wants to treat Wall Street.

Last year, as an article in The New York Times
points out, Wall Street bankers, worried that the U.S. was losing its
edge in the financial business, pushed for looser regulation of
financial markets. Mostly, they argued that the alphabet soup of
agencies designed to regulate markets had become overlapping and
outdated, which is true enough. But what they wanted was to replace
rules with "principles" that would govern their behavior. In other
words, the new rules would be that there would be no rules.

One credit crisis later, Treasury Secretary Henry M. Paulson Jr. has introduced a plan
that will take a step toward doing just that. It will streamline
bureaucracy, which is certainly a good thing. But it will also give
much more power to the Federal Reserve – which helped cause the
subprime crisis by ignoring every warning sign that one could possibly
expect. In other words, the government wants to reward the Fed for
doing a terrible job – just as the Fed did with Bear Stearns.

At
this point, it should be obvious to everyone that we need to better
regulate the financial system. Some of this work involves streamlining
the responsibilities of various agencies. But most of it involves
making sure that we monitor the behavior of bankers before we have to
bail them out of bad bets. During the Depression, the government
essentially said that it would back up commercial banks so long as they
abided by certain rules. Now it's backing up investment banks without
getting anything in return. That's silly.

What's offensive about Paulson's plan is that it seems to suggest that
the biggest problem with Wall Street is that it's having trouble
staying competitive at a time when London is becoming a more important
financial capital. If that's so, one reason is the inflated salaries of
American bankers, who make far more than their international
counterparts. Why shouldn't bankers be subjected to the same pressures
that affect workers in other fields? The financial business has become
important to the American economy, it has also ravaged that economy by
speculating recklessly. And while it employs plenty of people, most of
them are pretty obnoxious. I'm only half-kidding.

As we
recover from the current credit crisis, we need to create a new system
of rules to govern the speculation that caused it. What Paulson has
suggested isn't even close.