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Efforts to regulate 'Wild West' markets are long overdue

Moves by the Fed and the Treasury to prop up mortgage giants are a welcome sign.

By David R. Francis / July 21, 2008

Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke might be surprised to hear themselves compared to Wyatt Earp, the iconic figure in American history, who helped restore some order to the Wild West of the 1800s.

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But Bill Gross, manager of $812 billion of investments (about 1 percent of the total financial market in the United States), refers to the nation's financial markets as today's "Dodge City," and moves by the two Washington officials last week as an effort to bring a greater rule of law and order to it.

New and strengthened regulations springing from the current financial crisis will be significant and probably good, says Mr. Gross, cochief investment officer of PIMCO, a Newport Beach, Calif., firm managing the gigantic Total Return bond fund and other mutual funds. "Only time and the election will tell how far it will go," he says by phone.

Whenever capitalism goes badly astray, it usually results in a reaction bringing more regulation. Politicians want to do – and be seen as doing – something to patch up the mess. The major corporate and accounting scandals involving Enron, Tyco, WorldCom, and others prompted Congress to enact the Sarbanes-Oxley Act in 2002, enhancing standards for US corporations, management, and public accounting firms. The goal was to restore public confidence in the nation's capital markets.

Now rampantly greedy and unwise behavior in selling subprime mortgages and various fancy financial instruments, combined with the bursting of the housing market price bubble, has prompted another stock market collapse, a series of failing banks, and last week's mess surrounding Fannie Mae and Freddie Mac, two mammoth providers of credit to the mortgage industry.

"To me," says E.J. Dionne, Jr., a fellow at the Brookings Institute in Washington and a Washington Post columnist, "the crisis calls conservative ideology into question."