The Best-Laid Plans of Mice and Men ...

The Bush Administration is going to roll out yet another new plan to save the financial markets this week. The plan will expand the powers of the Fed, making it a "financial supercop" able "to send SWAT teams into any corner of the (financial) industry," according to a New York Times article.

Oh boy. We're safe now.

Is it appropriate for a central bank - whose role is to effect monetary policy to achieve a dual mandate of price stability and full employment - to be made a "supercop?" Also, is the Fed even up to the task? The article notes that the plan involves major reforms to the "hodgepodge" of financial regulators we have now, "which many experts say failed to recognize the rampant excesses in mortgage lending that set off the current economic turmoil." Well ...

SO DID THE FED!

At least one of those banking regulators warned then-Fed Chairman Alan "Bubble-Man" Greenspan about the brewing crisis, and he pooh-poohed the risk. True, we have a different Fed chief at the helm now, one who doesn't appear to be as laissez-faire about regulation as his hands-off, Ayn-Rand-devotee predecessor. But thus far, he hasn't exactly proven masterful at understanding, averting or resolving the current mess.

In short, my fear is that he's inept.

And we will have other Fed chairs in the future, so we may again get an extreme free-markets guy like Greenspan, and then what? Does the oversight role change? Central bankers should make monetary policy. Regulators should regulate. And never the twain should meet.

The plan would provide for oversight of investment banks, brokerage firms, hedge funds, private equity firms, presumably all the alphabet soup entities out there like SIVs and CPDOs, and insurance companies, which heretofore have been regulated by the states. The oversight would come from the Fed, the SEC - which would merge with the CFTC - and a new federal insurance regulator. No mention is made of regulating the ratings agencies, which contributed mightily to this mess by missing the boat in assessing risk (which is their only job), nor of the monoline bond insurers, though they'd ostensibly fall under the jurisdiction of the new insurance regulator.

This proposal will resonate with the Barney Franks of the world, but don't think that means it's a slam-dunk. The states will fight it tooth and nail, as they don't want to hand insurance oversight to the Feds. So will the OTS, which would be eliminated as part of the plan, which also calls for elimination of the distinction between banks and thrifts. A single bank regulator would be melded from the five we now have, so there'd be resistance on other fronts as well.

Indeed, administration officials concede that the plan likely won't become law this year. And that makes it a safe bet that it won't become law. It stops short of calling for new regulations on lenders and other financial players; it basically just says that when a problem arises, the Fed can swoop in to fix it (presumably with a taxpayer bail-out - see Bear Stearns). It reminds me of the time, back when I was an S&L examiner, that I was asked by a thrift I was examining what they should invest in. I asked my boss if I should be dispensing investment advice. His answer?

"Nope. Our job is to shoot the wounded."

Well, if a Democrat wins the White House, they'll undoubtedly take the position that a pound of prevention is worth an ounce of cure, calling for more regulation. And they'll be pressured to maintain the current size of the banking regulatory force, which they'll likely do. So we shouldn't expect to see this plan take effect even after this year.

But it makes for good politics. It makes ol' Hank Paulson, who was the plan's architect, look like he's doing something productive. And it rewards Helicopter Ben Bernanke for being a puppet of Wall Street.

Speaking of Hank, he hinted at the plan in a speech last week to the US Chamber of Commerce. In that speech, he said two things that struck me (one funny, one angry).

First, he claimed that his hapless HOPE NOW plan is working, claiming that "since July, more than 1 million struggling homeowners received a work out ... that helped them avoid foreclosure." For now. He didn't say how many of them have since foreclosed anyway, or will.

He also said that "work out efforts are accelerating more quickly than the foreclosure rate," noting that "January foreclosure starts were up 5% while the number of mortgage workouts grew 19%." Remember Disraeli's line, "There are lies, damned lies, and then there are statistics?" This is one of those times that it's good to understand what that means.

I don't know the exact numbers, but it's a safe bet that there are a heck of a lot more foreclosures out there than workouts. So 5% of a huge number is still going to be more than 19% of a minuscule one. Of course, Hank would rather work with percentages - at least in this case, where it suits his point.

The quote that raised my blood pressure was this one, which he uttered after noting that the government isn't interested in bailing out speculators: "The people we seek to help are those who want to keep their homes but can't afford the monthly payment because of an ARM reset. If they also have negative equity in their homes, refinancing becomes almost impossible."

My question is, why does the government seek to help irresponsible people who wanted to live beyond their means, over-leveraged themselves into more house than they could afford, fueled a bubble that is now affecting the rest of us, thought what they were doing made perfect sense because their home prices would appreciate by 15% a year forever, and now that they've been proven reckless and stupid, want a handout?

In Merrie Olde England, they used to put those people in debtor's prisons, or make them work off their debts in servitude. Now, we bail them out. Times have changed.