Hank Paulson should go back to trumpeting his “Strong Dollar Policy.” He recently made comments in London regarding stability in financial markets during market crashes.

U.S. Treasury Secretary Henry Paulson called for regulatory changes that would allow financial firms to fail without threatening market stability.

The Treasury chief also proposed potentially requiring the White House to sign off on using taxpayer funds to aid a financial company. In a speech in London, Paulson identified a legal gap that leaves unspecified how to deal with failures of companies that don’t take deposits, such as investment banks.

Paulson’s proposals aim to tighten supervisors’ oversight of lenders and dealers while at the same time discourage companies from depending on a government rescue if their bets go wrong. His speech comes a week before a congressional hearing to debate a regulatory overhaul in the wake of the credit crisis that caused the near-bankruptcy of Bear Stearns Co.

We need to create a resolution process that ensures the financial system can withstand the failure of a large complex financial firm,” Paulson said in the speech at Chatham House, an international affairs research group.

Hank, are you serious?

If the stock market went up in response to the success of financial firms, it should then, go down in failure. It’s sort of like those Newtonian laws of physics where every action produces an equal and opposite reaction.

I am particularly appalled at the following statement:

The Treasury chief also proposed potentially requiring the White House to sign off on using taxpayer funds to aid a financial company.

So the hard working citizens of the United States should throw their money at these investment firms when they make a bunch of crazy bets on subprime and CDOs?

We need to create a resolution process that ensures the financial system can withstand the failure of a large complex financial firm,” Paulson said in the speech at Chatham House, an international affairs research group.

Hank, how about ensuring the SEC does its job by enforcing common accounting standards? How about getting rid of the fractional reserve system so these banks don’t take on more debt than they can handle (Indymac, WAMU, Wachovia, the GSEs)? Artificially propping the market defeats the purpose of bear markets: to transfer the ownership of losing assets to new owners so that they can be used for new, productive purposes.

Update 7/15: Paulson was hammered on Capitol Hill last Tuesday (7/15), in particular by Senator Jim Bunning of Kentucky for his plan to keep Fannie and Freddie stock artificially up by the Treasury. The Federal Reserve wants to open the discount window to Fannie and Freddie, and the Treasury wants the power to buy stock in the GSEs with no limit. Also, the SEC is going to prevent short sales of Fannie and Freddie and other large financial institutions by limiting the amount of shares that can be borrowed.

The government is hoping that by inflating their way out of this mess, that the GSEs can remain solvent. The road to hyperinflation has been chosen.

Video of Bunning sparring with Paulson
http://www.cnbc.com/id/15840232?video=794244797

Link to original article: http://www.bloomberg.com/apps/news?pid=20601103&sid=aboaHbnfqqds&refer=us