Op-ed Spotlight: Hank Paulson Tells Us How to Reform the Financial Sector

If you can't do, teach

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Former Treasury Secretary Hank Paulson has a somewhat battered reputation for letting Lehman collapse while keeping Goldman Sachs afloat. But he's returning to the public forum, with a new book on the crisis coming out, and a long-ish New York Times op-ed Tuesday running under the headline "How to Watch the Banks."

Paulson doesn't think the financial reforms proposed by the Obama administration will be effective. The latest one--"to bar big banks from trading driven by other than customer-related activity--would not have prevented the collapse of Fannie Mae, Freddie Mac, Lehman Brothers, American International Group, Washington Mutual, Wachovia or other institutions whose failure contributed to the crisis," he argues. So what would prevent such a collapse?

Paulson advocates the creation of a "systemic risk regulator." He thinks the Fed would be the best institution for the job, but also thinks a council of regulators could work as long as it is "led by either the Treasury secretary or the Fed chairman," and structured to reach "strong decisions ... quickly."

Paulson's second recommendation is to give the government the "resolution authority to impose an orderly liquidation on any failing financial institution to minimize its impact on the rest of the system." No bank, he says, is "too big to fail." He ends by emphasizing the need for political courage, and, eventually, for reducing budget deficits, "a big part of which will involve reforming our major entitlement programs: Medicare, Medicaid and Social Security."

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