Mr Paulson's solution

Henry Paulson Jr, the US treasury secretary, has proposed a slew of regulatory changes in the United States which contain something unpalatable for every school of thought. Those who think that the big financial firms have got away with too much and need tighter regulation, are angered by the moves towards lighter, "principles-based" (as different from "rules-based") regulation, and say that nothing else can be expected of the former head of Goldman Sachs. Those who fear that the sub-prime mortgage crisis and its fall-out have created a climate in which the US government will be forced to respond with a Sarbanes-Oxley kind of overkill, think poorly of Mr Paulson's move to extend the scope of regulation to what have so far been lightly supervised financial sectors. Mr Paulson himself has responded to the criticism that he is proposing both too much and too little regulation at the same time, by saying that his intent has been in another direction altogether, which is to look at regulatory structures and responsibilities.

Critics on one side of the room argue that the present financial crisis was a result of regulatory failure (the Federal Reserve did not do anything to ward off the sub-prime problem and ignored those who were blowing the whistle on the issue). Therefore, in their view, more regulation cannot be a solution since this cannot rule out fresh regulatory failure. Other critics point to the lack of any element which would make the system respond more to troubled sub-prime mortgage customers than to wealthy investment bankers on Wall Street. Amidst this welter of criticism, what seems to be clear is that a Congress that is controlled by the Democrats is not going to give Mr Paulson the support that he seeks. The treasury secretary, realising this, has argued that he does not expect immediate approval, and in any case that the debate will go on into the next administration (ie post-January 2009). What is interesting here, in the context of the debate in India, is the proposal to merge the Securities and Exchange Commission and the Commodities Futures Trading Commission "" in India, in contrast, Sebi and the Forward Markets Commission remain separate bodies.

Whatever package of reform measures finally proves acceptable to Congress, it is clear that reform is needed. The revelations in recent weeks about some of the financial practices in the mortgage business make it self-evident that tighter regulation is required here, and the proposed creation of a mortgage commission that would set the standards and norms is a logical step. Investment banks too should expect tighter regulation, for anything else would be unthinkable in the wake of the Federal Reserve having had to bail out Bear Stearns "" if public money is to be risked on these institutions, then they have to accept proper oversight. What has not been looked at, though, is the need for going back to the Glass-Steagall law, which separated investment banking from commercial banking""a wall that was broken down a few years ago.