The Wall Street Journal fronts news that a plan is taking shape within the Bush administration to turn the Federal Reserve into a regulatory “supercop” in what would be the most sweeping changes in financial regulation since the Depression.

The Journal says Treasury Secretary Henry Paulson’s plan would create an agency to monitor states’ home-lending regulation, create a federal regulator for insurance companies, merge some of the existing agencies, and make the Fed responsible for looking for and acting against “all threats to the stability of the nation’s financial system.”

The Financial Times puts the news on page two and says in its lede that “its recommendations may be more notable for what they do not seek to tackle.”

The FT reports that the plan only proposes that the Fed act when the whole market is endangered, not if “one bank or brokerage was taking on excessive risk.” The paper says the plan also doesn’t address the practice of creating AAA-rated securities out of junk mortgages or the trillions of dollars of complicated derivatives that no one seems really to understand and which are the Wild West of the financial system.

Why trust the Fed?

Bloomberg goes high with the elephant in the room that the WSJ and FT don’t get to: the handoff of big-time power to the Fed, one of our most undemocratic and least-transparent government institutions.

“It would be Congress and the president essentially giving a blank check to a regulator over which they have very little power,” said Michael Greenberger, a professor at the University of Maryland in Baltimore and a former CFTC official.

But the plan is more likely a bid to steer the conversation—Bush is an unpopular lame duck and the Democrats don’t seem inclined to cooperate:

Rep. Barney Frank of Massachusetts, the Democrat who chairs the House Financial Services committee, said he found the plan encouraging. But he said that for the rest of this year, lawmakers need to devote all their energy to stabilizing the mortgage-market turmoil rather than determining broader fixes. “It’s too close to an election and it’s a very major thing,” he said.

Another Dem, former Treasury Secretary Lawrence Summers, has our Makin’ Sense Quote of the Day:

“It’s probably a bad idea to spend too much time debating the organization of the fire department while the fire is still burning and no independent investigation of the cause of the fire has yet been completed.”

To be fair, Paulson says as much, too.

Regulatory cluster-&%$!#

If you’re still wondering how things have gone so wrong in the markets, the Journal has an illuminating few paragraphs on the soon-to-be-former regulatory environment that has prevailed for years:

There’s widespread consensus that the current patchwork regulatory system doesn’t work. One problem is that overlapping jurisdictions lead regulators to court the regulated. A year ago, for instance, at a Honolulu hotel, the heads of three federal regulatory agencies charged with guarding the soundness of America’s banks addressed 3,000 community bankers and delivered this message: We’re the ones you want regulating you…

Each agency—OTS, the Federal Deposit Insurance Corp. and the Comptroller of the Currency—implied it would be more pleasant to deal with than the others on the stage.
“It’s not a good idea to have people competing with each other, particularly if they’re competing in laxity,” says Hal S. Scott, professor of international financial systems at Harvard Law School.

It does indeed put a new spin on “free-market competition.” The WSJ doesn’t say if this is a result of the business-friendly Bush administration or if it predates it.

NYT’s BS detector sharp

The New York Times fronted its Paulson analysis on Sunday, and even though it gave its competitors a head start, it still stands as the best—and most skeptical—overview of the plan. It notes that private equity and hedge funds would be regulated for the first time, but that regulation would be limited to collecting information until its too late and the crisis is upon us. The WSJ in a C1 story, though, says hedge funds aren’t the “target of any specific new regulations” but two sentences later says the plan gives them an “overseer”, which they haven’t had previously.

The NYT calls Paulson’s plan BS, saying it’s an attempt to fend off stricter regulation rather than impose it, quoting the secretary as saying he doesn’t think regulators are to blame (apparently at all) for the financial crisis. In a sharply worded rebuke of Paulson, the Times exposes the folly of this worldview:

The Treasury says that it and other federal regulators still believe a principle it enunciated a year ago, “that market discipline is the most effective tool to limit systemic risk.”

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.