Indisciplined Democrats vs regulatory reform

By Felix Salmon
January 25, 2010

Barack Obama ran what was arguably the most disciplined and on-message presidential campaign in history. But all that the Republicans need to do right now to ensure that financial regulatory reform never happens is sit back and watch the Democrats fight each other to a bloody stalemate. It’s inconceivable that the GOP would ever allow itself to get into a mess like this.

I don’t think anybody anticipated this turn of events back in June, when we saw the first relatively detailed Treasury proposal on the subject. Sure, there were a lot of problems with it, but it was necessary, the Democrats had control of both houses of Congress, and at least it was something. What’s more, insofar as there were weaknesses in the proposal, they were generally a direct consequence of the fact that Treasury had been careful to put together a proposal which could pass political muster.

Except, Treasury’s finely-honed political calculations turned out to be somewhat awry: it wasn’t long before Barney Frank was tearing into one of the key legs of the proposal, removing both community banks and the vanilla option from the Consumer Financial Protection Agency.

And then Chris Dodd came along, with his own set of entirely idiosyncratic ideas: where Treasury put the Fed at the center of the regulatory nexus, for instance, Dodd wanted to remove it from that role entirely. And where Treasury soft-pedaled on regulatory consolidation, for fear of angering powerful constituencies, Dodd went much further, combining not only the Office of the Comptroller of the Currency with the Office of Thrift Savings, but throwing in the Federal Deposit Insurance Corporation for good measure.

At this point, all semblance of party discipline had clearly broken down. Did the Republican leadership in the Senate ever put forward versions of White House proposals which were fundamentally at odds with what George W Bush’s White House wanted? There’s a time and a place for negotiating these things, but Dodd seemed to have slept through that entire time period, releasing his list of bright ideas a good five months after the release of the Treasury plan should have put an end to the discussions.

And then, of course, Scott Brown won in Massachusetts, and the White House, in something of a panicked move, decided to marginalize its key economic advisors — Tim Geithner and Larry Summers — in favor of the more radical, if much less thought-through, ideas of Paul Volcker. Again, there’s a lot to like in those ideas. But we’re now up to four competing conceptions of financial regulatory reform: Treasury’s, Frank’s, Dodd’s, and Volcker’s. And that’s just within the Democratic party; the Republicans, of course, rejuvenated by the result in Massachusetts, have their own ideas. And if you thought Big Finance was powerful before the Supreme Court decision in Citizens United vs FEC, you can imagine how wary many Democrats are now of risking the ire of the lobby with the deepest pockets of all — and how keen they are to have its support.

The upshot of the whole sorry story is that the Democrats seem to be very good at doing the divide-and-conquer work of the banking lobby all on their own; the lobbyists’ main job is to stand back, keep quiet, and watch the process get mired down in endless second-guessing and debate. After all, the one thing that everybody in government can agree on right now is that they want to crack down on bankers in some way or other. The problem is that with no end in sight to the fight between all the competing ideas currently doing battle in Washington, there’s a very good chance that none of them will win, and that we’ll end up with the worst of all possible worlds: a continuation of the status quo.

Update: Tim Fernholz responds.

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