It certainly looks as if Senator Chris Dodd, at least, isn’t too big too fail. The powerful Connecticut Democrat and chairman of the Banking Committee trails his likely 2010 Republican opponent by nearly 10 points in polls and can’t even crack the 40 percent level, an ominous sign for an incumbent.
While history hints that next year should be tough anyway for Democrats like Dodd — the president’s party has lost an average of four Senate seats during midterms since the 1940s — the five-term lawmaker has plenty of troubles of his own.
There are questions about the circumstances surrounding his purchase of a pricey “cottage” in Ireland. And Dodd was only recently cleared of accusations that his mortgages from Countrywide Financial broke Senate gift rules. Indeed, a Quinnipiac poll found that just 35 percent of those surveyed believe Dodd to be honest and trustworthy.
But it’s Dodd’s role as Banking Committee chairman that may be his biggest problem. The position continues to link him to the financial meltdown, which has made virtually all incumbent politicians look feckless. Not all incumbent politicians, however, have been the biggest recipient of campaign cash over the past two decades from Fannie Mae and Freddie Mac. Those would be the same failed mortgage giants whom Dodd called “fundamentally strong” just before their government bailout and takeover.
So it’s no surprise that Dodd is thought to be leaning toward giving up the chairmanship of the Banking Committee for that of the Health Committee, formerly run by the late Edward Kennedy. Though being closely linked to that issue is hardly without risks — just ask all the Democrats who got the boot in the 1994 midterm elections — at least it’s something that average voters can easily relate to. Most Americans probably don’t dwell much on which government agency should monitor systemic risk.
But the departure of Dodd from Banking would be a real loss, if for no other reason than he is dubious about making the Federal Reserve the super-regulator of the American financial system. (His likely successor, Tim Johnson of South Dakota, is an unknown quantity.) Earlier this summer, Dodd told Reuters that “those who are advocating the Fed’s role in all of this as a systemic risk regulator ought to be prepared to then concede a good chunk of independence of the Federal Reserve. I think that poses some serious issues.”
Indeed, it does. The more the Fed is involved in the regulatory process, the more it will be open to political scrutiny, since regulation creates winners and losers — both of whom probably have political action committees and Washington lobbyists.
As it is, the Fed has been in the congressional cross-hairs as never before because of its efforts to stabilize the credit markets and U.S. economy. Witness, for instance, the hammering Fed Chairman Ben Bernanke took from a House panel concerning his role in the Bank of America-Merrill Lynch merger. And then there’s the effort, one gaining momentum, to audit the Fed. That could open the central bank to far more intrusive congressional critiques of monetary policy.
It’s also worth mentioning that the Fed, despite its reputation as a regulator extraordinaire, has a poor track record at dealing with systemic risk, or even identifying it in a timely manner. As noted Fed historian Allan Meltzer told a House panel in July, “I do not know of any clear examples in which the Federal Reserve acted in advance to head off a crisis or a series of banking or financial failures.”
Dodd, for now, appears to be cooking up his own approach, creating a U.S. version of the Financial Services Authority of Britain, that would actually strip the Fed of its regulatory portfolio. Of course, a new regulator might not be any more prescient or proactive than the existing ones. But at least it wouldn’t compromise the independence of America’s central bank in the process.