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A fruitless overhaul plan

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We're still puzzling over how Treasury Secretary Henry Paulson Jr.'s plan to overhaul the nation's financial oversight would have averted the current banking mess.

He says the current regulatory system is too antiquated to respond to today's complex financial instruments and interconnectedness, products of an Information Age in which computers can do things yesterday's pencil-pushers in green eyeshades couldn't dream of doing. But the institutions whose very survival depended on them making wise decisions couldn't avoid the conditions that have led to problems in the mortgage industry. Why would anyone believe federal regulators, with little personal loss at stake, would do better?

The fact is they didn't, even though they had the authority to put the brakes on risky lending practices.

It is interesting to note that a day after Paulson's announcement earlier this week, the stock market rallied impressively, fueled by a surge in financial stocks. This could be an indication that investors believe the worst of the bad news is in the rear-view mirror. The private market, which has a ruthless way of purging itself for its own mistakes, works far more efficiently than anything government regulators could devise.

That said, Paulson does make a strong argument that the current regulatory system provides too much overlap and may be too antiquated. That requires organizational changes that ought to be made as unobtrusively as possible.

The truth is that virtually no part of Paulson's plan will become law any time soon. With an election looming in November, and with members of Congress tied up with political considerations at home, few things are as certain as the belief that no radical overhauls will find their way to the president's desk this year. That will be the job of the next treasury secretary and president. By then, one hopes, the current crisis will have softened to the point that other issues seem more important.

The old maxim still holds true. Governments generally can impact the economy only one way — negatively. The nation needs federal regulatory agencies to ensure fairness. It needs the Federal Reserve to conduct monetary policy. Beyond that, it needs to let the free market work.