Treasury Secretary Henry Paulson said Wednesday that investment banks may require the same government oversight that commercial banks face if they will borrow federal money. Economic analysts weigh the pros and cons of increased federal regulation.
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In the wake of the credit crunch, there has risen up a chorus of calls in Washington for greater regulation of investment banks, hedge funds, and other Wall Street players that don’t meet the traditional definition of a bank.
Those calls only grew louder after the Federal Reserve guaranteed financial assistance to ensure JPMorgan Chase could buy Bear Stearns and after the Fed recently announced that it would lend investment banks up to $200 billion if needed.
Today, Treasury Secretary Henry Paulson said for the first time that more regulation of those institutions may well be necessary.
HENRY PAULSON, U.S. Treasury Secretary:
The circumstances that led the Fed to modify its lending facilities raises significant policy considerations that need to be addressed.
Insured depository institutions remain important participants in the financial markets, but this latest episode has highlighted that the world has changed, as has the role of other non-bank financial institutions, and the interconnectedness among all financial institutions.
These changes require us all to think more broadly about the regulatory and supervisory framework that is consistent with the promotion and maintenance of financial stability.
So should Wall Street firms be more tightly regulated by the federal government? We get two perspectives.
David John is a senior research fellow at the Heritage Foundation. And Dean Baker directs the Center for Economic and Policy Research.
Gentlemen, thank you both for being here.
I first want to ask you to explain briefly the difference between regular banks, where people keep their savings account, their checking accounts, and where they borrow money, and investment banks, David John?
DAVID JOHN, Senior Research Fellow, Heritage Foundation:
Well, a regular bank, as you say, takes deposits from people like you and I, and those are insured by the federal government, and it has a fairly restrictive amount of business activities it’s allowed to undertake. It typically will do all the personal lending, credit cards, mortgages, and that sort of thing.
An investment bank, on the other hand, doesn’t do any of those necessarily, but it underwrites stocks and bonds and does investments, for instance investing for our pension funds or something along that line.
There’s a lot more risk in an investment bank, and there’s no insurance from the federal government.