(AP Photo Lawrence Jackson)

by Frank James

Treasury Secretary Henry Paulson is a generally well-respected Wall Street guy, being the former chairman and chief executive of Goldman Sachs, one of the most successful investment banking firms.

So his Wall Street cred may make his call today for additional regulatory scrutiny for investment banks go down a little better with his former colleagues than if he hadn't once been a fellow Wall Street titan. Then again, maybe not.

In a speech before the U.S. Chamber of Commerce, Paulson indicated that because the financial markets are interlaced in ever more ways, and because the Fed is now making its funds available to non-bank institutions like investment banks, it's necessary for the non-bank banks to open themselves up to a greater degree of regulatory oversight.

Here's how Paulson framed it:

Insured depository institutions remain important participants in the financial markets, but this latest episode has highlighted that the world has changed, as has the role of other non-bank financial institutions and the interconnectedness among all financial institutions. These changes require us all to think more broadly about the regulatory and supervisory framework that is consistent with the promotion and maintenance of financial stability.

Now that the Fed is granting primary dealers temporary access to liquidity facilities, we must consider the policy implications associated with such access. Historically, commercial banks have had regular access to the discount window. Access to the Federal Reserve's liquidity facilities traditionally has been accompanied by strong prudential oversight of depository institutions, which also has included consolidated supervision where appropriate. Certainly any regular access to the discount window should involve the same type of regulation and supervision.

...Perhaps most importantly, the Federal Reserve should have the information about these institutions it deems necessary for making informed lending decisions. The Federal Reserve is currently working to ensure the adequacy of such information.

But Paulson also indicated that he envisions the kind of actions that the Fed has taken recently to increase the money flow in the credit markets as limited to only to certain firms and only during times when the financial system is in crisis.

Despite the fundamental changes in our financial system, it would be premature to jump to the conclusion that all broker-dealers or other potentially important financial firms in our system today should have permanent access to the Fed's liquidity facility. Recent market conditions are an exception from the norm.

At this time, the Federal Reserve's recent action should be viewed as a precedent only for unusual periods of turmoil.