Today Dr. Paul Participates in “Systemic Risk and the Financial Markets” Hearing

In March 2008, the Federal Reserve brokered a deal that saw the nation's fifth largest investment bank, Bear Stearns, sold to JP Morgan Chase at a fire sale price. The official price was a mere $2 per share -- shocking considering Bear's stock was trading at close to $100 less than a year earlier. Nevertheless, the Fed extended a $29 billion loan to JPM Chase to cover the transaction, effectively shifting the majority of the risk to American taxpayers.

These extraordinary and unprecedented actions by the Federal Reserve were defended on the grounds that a Bear Stearns failure could have potentially threatened the entire global financial system. This is what is meant by "systemic risk," the notion that our current global financial system is so fragile that what normally should be a relatively minor event (the failure of a single bank), could cause an uncontrollable cascading chain of defaults around the world that would ultimately ruin the entire system.

Were the Fed's actions justified? Who is truly to blame? Is the Fed in any way responsible for encouraging the excessive risk taking that we see in financial markets today? After all, if market players know they'll be bailed out in the end, why bother to limit risk? And what will the Fed do the next time it is faced with a similar situation?

Because of recent events, a regulatory push is now underway to expand the Federal Reserve's authority in regulating investment banks such as Bear Stearns. The reasoning is that if these banks are to benefit from future Federal Reserve help, then they should also be subject to increased scrutiny by the Fed.

These issues will form the backdrop of Thursday morning's Hearing on Financial Market Regulatory Restructuring. According to the official announcement, this will be "the first of a series of hearings on the policy implications of the transformation of domestic and international financial markets, with a primary focus on the rise of potential systemic risk associated with the dramatic growth in the share of assets held outside the commercial banking system, the complex arrangements that link firms that are regulated differently (or not at all) and the increasing amount of leverage."

In attendance will be Treasury Secretary Henry Paulson, Federal Reserve Board Chairman Ben Bernanke, members of the Committee on Financial Services including, of course Dr. Paul, asking (as Jesse Benton put it) the tough questions that no one else will.

The hearing should be carried live on CSPAN, though it will most certainly be on CNBC. Bloomberg TV is an even better bet, usually with fewer interruptions.

The second hearing in this series will likely be on July 24, 2008 and include testimony from Chris Cox, Chairman of the Securities and Exchange Commission (SEC) and Timothy Geithner, President of the Federal Reserve Bank of New York. Stay tuned.