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Paulson Statement on Regulation - Essay Example

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Essentially, the remarks of Treasury Secretary Henry M. Paulson before the U.S. Chamber of Commerce dealt with the current, turbulent state of the country's financial and housing markets in the wake of the sub-prime mortgage crisis and the domino effect it has dealt to the economy…
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Paulson Statement on Regulation
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Download file to see previous pages He reiterated his confidence in the strength and resiliency of the country's capital markets, and that the country would be able to work its way out of the situation.
In his introduction, the Secretary remarked that the most pertinent priority of the government was to limit the actual effects of this crisis on the country's real economy. He advised that the key to keeping the country's economic state above water was to maintain liquid and stable financial markets, and that banks must put in their fair share by making credit readily available both to ordinary citizens and businesses. He added that there must be vigilant efforts introduced in order to dilute the destructive effects of the recent housing downturn on the economy.
In addressing the importance of orderly financial markets, Paulson stated that the recent turmoil the capital markets have been facing were largely in part to the reduced access to short-term funding, which in turn caused widespread liquidity issues even with the biggest investment banks. As a result of these volatile conditions, Bear Sterns, the country's 5th largest investment house, found itself in bankruptcy. He justified the Federal Reserve's intervention leading to the JP Morgan buyout, stating that market stability was the primary concern of the government and the issue warranted prompt resolution.
In light of the Bear Sterns fiasco, the Federal Reserve took a leap of faith by putting forth a temporary program which is meant to provide short-term liquidity to primary dealers. From a historical perspective, such bold moves by the country's central lending institution had not been propagated since the 1930's. While Paulson praised the Federal Reserve for its creativity in dealing with a potentially crippling situation, he chided that such drastic measures also have corresponding repercussions which need to be addressed. He argues that while commercials banks have traditionally had access to the Federal Reserve's liquidity facilities, these have been accompanied by strong regulation and supervision to avoid and potential pitfalls. Hence, the same measures should be enacted this time around if only for the sake of prudence. Paulson suggests that in opening the discount window temporarily to non-insured and non-depository institutions, tighter measures must be enacted in screening these institutions, which will enable them to make better informed lending decisions.
In explaining the current mortgage crisis, he admits that its rapid free-fall has adversely affected both financial institutions and capital markets alike. Far from putting the blame on the inherently flawed sub-prime mortgage system, he argues that unsustainable home price appreciation in certain key areas was the primary driver behind the crisis. Also, once stability is restored to the housing sector, this will lead to a much more favorable situation for institutions involved with mortgage-backed securities.
Paulson admits that with the current housing crisis, the availability of mortgage financing has been almost non-existent, due largely in part to the crippling liquidity problems that have beset lending institutions. He offers that in order for the housing and mortgage industry to get back on its feet, government-backed institutions such as Fanny Mae and Freddie Mac should be willing to ...Download file to see next pagesRead More
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