Paulson Seeks to Prevent Future Crises

We'll get all the details later this morning, but judging from Damian Paletta's curtain-raiser in the WSJ, Hank Paulson has some pretty good ideas about shoring up the US financial system and ensuring that a crisis like the one we're going through won't happen again. Of course, no crisis is exactly like the last, so the chances that we'd get a second crisis like the one we're going through were always pretty minimal to begin with. But still, the changes are overdue and generally a Good Thing.

None of the ideas are particularly surprising; some of them were in a speech Paulson made back in October. Regulating mortgage brokers and lenders is long overdue, and as I've said before doesn't even go far enough: brokers should be given a fiduciary duty over their borrowers. But it's certainly ridiculous that banks operate under a massive system of regulatory oversight, while mortgage lenders are essentially unsupervised.

Paulson also feels that the fiction of a single ratings scale has outlived its usefulness: there should be separate ratings scales for plain vanilla credit and for structured instruments. (And, maybe, for munis, too?) If a ratings agency rates an asset-backed security, he wants the agency to scrutinize the underlying loans more carefully: that too is surely a good idea.

And if you thought Basel II had any chance of getting implemented across the US any time soon, think again. Which also makes sense: it's been tested by this crisis, and parts of it - the bits relying on banks' internal risk-management systems, or on triple-A ratings - have been found to be too weak.

None of this, of course, will help to solve the present crisis, and nor is it meant to. But there's never a bad time to strengthen the financial system so it can better weather future crunches.