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Federal regulatory proposal has financial skeptics aplenty

The U.S. Treasury Department recently unveiled its Financial Regulatory Reform Plan designed to curb sagging credit markets and ward off what every official in the financial sector fears the most, a word many even refuse to say — recession.

Treasury Secretary Henry Paulson, in announcing the plan, said it would create more regulatory efficiency and would create a Federal Mortgage Origination Commission that would develop licensing standards for states’ mortgage lenders and “evaluate the overall adequacy” of the state system.

One problem with that, says one of the state’s financial academics, is that it is an overreaction that punishes every state for problems that were created in just a few areas of the country.

Cover those backsides

“I would argue we don’t need it,” said Dr. Trellis Green, associate professor of economics, finance and international business at the University of Southern Mississippi.

“It’s a one-size-fits-all solution to regional problems and that never works real well. If it was a U.S. problem, I would not be so critical.

“It’s like gun laws that are not being enforced and you have lawmakers coming up with all these new laws to stop gun crimes. There are enough regulatory laws already on the books, and if those were properly enforced you wouldn’t need something like this.”

The Treasury’s move comes on the heels of investment bank Bear Stearns imploding amid a mortgage crisis, brought on, Green says, by poor financial judgment made by the bank’s executives.

“When are we going to hold corporate people accountable for the stupid decisions they’ve made?”

Psychologically speaking

Financial markets are impacted by heavily by psychology. If there is a feeling that the economy is going south, that pervades market performance and stability. And moves like the Treasury’s is usually done to ease those fears and project the notion that everything possible is being done to restore order.

“It was done to inject confidence, I’m sure,” Green said. “Places like California, Atlanta and, worst of all, Florida were in a tailspin with their housing markets and their credit was crumbling, so there was this rush to do something about it instead of letting the market work.”

The Mississippi Department of Banking and Consumer Finance is not keen on the new regulations, either. Department Commissioner John Allison said the plan would have the opposite of the intended effect.

“The plan, which purports to create more regulatory efficiency, in effect, would create a vast new federal bureaucracy, with a bevy of new agencies all falling under the Treasury Department’s purview,” Allison said in a statement. “Our financial system has enabled a broad-based and diverse banking industry marked by meaningful choice in charters. This choice enables economic opportunity as well as a healthy dynamic tension among regulators, resulting in a wider range of products and services for businesses and consumers, along with lower regulatory costs and more effective, responsive supervision. In short, the U.S. economy flourishes because of our unique dual banking system, not in spite of it.

“The Treasury’s plan also seeks more preemption of state consumer protection laws, which will result in a significantly lesser role for the states and will make consumers more vulnerable to fraudulent or predatory (lending) practices. Preservation of state regulation is vital to ensuring consumers are adequately protected.”

Details, details, details

The Treasury is still hammering out the final version of its plan. As for long-term effects, Green says they will vary on what the Treasury’s final product is, but most of them will be negative.

“There will most likely be a smaller, more compact market of financial institutions and less risk-taking.

“And there will be lots, and I mean lots, of taxpayer money wasted. The whole thing was much ado about nothing.”

Contact MBJ staff writer Clay Chandler at clay.chandler@ msbusiness.com .

About Clay Chandler

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