The very notion of the “market stabilization regulator” role

I have been thinking about this for quite a while. In the midst of the crisis, Henry Paulson proposed four types of regulation in order to prevent similar kinds of disruptions in the future. Among the roles him and his team defined, one of it is “market stabilization regulator”. It defines its role as “to address overall conditions of financial market stability that could impact the real economy.” But, if one delves into the proposal that has been made, one can easily find out that there are really NO mentions about how to address the problems of the REAL economy. All of the contexts are tilted toward ensuring banks’ liquidity, but not other industry participants’ liquidity. Given the huge bailout money, in a perfect world, there should have been no severe credit shortages that we have seen during the crisis, and there should have been no harsh unemployment rate that we are observing today. The sole purpose of the whole bailout plan and its money should have been used to save our workplaces, not covering stupid derivatives positions. Therefore, I firmly believe that the US taxpayers’ money was/is used in a very ineffective way. And besides, there are some fundamental problems associated with indirect or on-lending practices (http://www.wateraid.org/documents/plugin_document…), whatever you call it. Then, what made this huge scheme fail? I think the main reason is the ill-defined role in the first place. What we have seen thus far is a disconnection between the finance industry and the Main Street during the crisis. While there was too much money poured into the whole finance industry, there was too little money poured into the manufacturing and service industries. Although, we haven’t seen major industry players go sour, it comes with a big price; our own jobs. If there were proper allocation and balance between how the money was distributed in each industry, we wouldn’t have seen this severe unemployment situation. In short, there is a sure dichotomy between the finance industry and the Main Street. Then, how should we go about solving this problem? Well, I think there needs to be a new organization that can look out for the real industries, besides the Fed. This will counter the excessive authority the Fed is exerting currently and stop subsidizing financial firms that should have went under.

Your thoughts?