Today Paulson gave a very interesting speech in which he stated that it was unclear whether the Fed had the statutory authority to rescue Bear Stearns, and urging reexamination of the scope of the Fed’s authority. He warned that the markets should not assume that the government will intervene to backstop financial institutions. He also rejected the “too big to fail” theory:
“Of course, the mere creation of a market stability regulator can increase moral hazard and decrease market discipline. The expectation that a regulator will intervene to protect the system must be limited to the greatest extent possible. In other words, we must limit the perception that some institutions are either too big or too interconnected to fail. If we are to do that credibly, we must address the reality that some are. “
In fact, his entire speech should be required reading. Here it is: paulson06192008
