February 05, 2010
Financial Reform Stalls in Senate
Posted by Erik Gerding

Senator Dodd just announced that efforts to broker a bipartisan reform bill in the Senate have sputtered and the Democrats will go it alone.  Does this mean that the Democrats will try to push a populist bill through by summer and paint Republicans as obstructionist and protecting Wall Street?  My guess is yes.

Will it be politically successful?  Part of the problem is execution -- particularly the President's self-created image (and possibly his temperment) of being the great uniter.  Can and will he shift from the "let's have beers at my place and talk it out" to the LBJ "I'll bury you and your grandma" style of politics? 

Will any bill that comes out be good policy?  As I mentioned before, I have serious reservations about the bank risk tax.  (Don't get Christine started).  As I'll post later, the Volcker Rule may be better, but so far all we have are very vague outlines of what it will look like concretely.  (The White House seems like a scholar that is really polished at writing abstracts for papers, but has yet to actually get something published.  Good luck with the tenure vote). 

As I mentioned before, I don't fully understand politically why the Obama Adminsitration did not lead off with financial reform.  In the comments to my post, Brett McDonnell and Elizabeth Brown questioned my premise that financial reform would have been a net gain of political capital for the Obama Administration.  They made some compelling points that the Administration was dealing with dissent from independent agency heads and did not have as clear an idea of what they wanted to do with financial reform as they did with health care.

I'm still not so sure financial reform is not an easier sell.  Among agency heads, only Sheila Bair at the FDIC has built serious political clout during the crisis.  And since when did politicians wait to have a clear sense of the problem before legislating?  It is true that the Democratic base has been dreaming about health care and that it was a centerpiece of Obama's campaign.  Perhaps the Democrats gambled that it was better to get the more ambitious program through first before they got bogged down in mid-term elections and then the next Presidential campaign.  That worked really well.   

Elizabeth made a good point that it is hard to overcome small cohesive groups with large stakes in a political fight.  That likely explains part of why credit rating agencies have escaped any serious reform efforts so far.  (But I think that same logic applies to healh reform.  HMOs, Big Pharma, the AMA, AARP, all have well-run political machines). 

There is something to be said for going slow (see Posner, Feibelman & Omarova, Cunningham & Zaring) with major reform and getting it right.  But the political attention cycle will turn.  And there is nothing to be said for doing nothing. 

Current Affairs, Financial Crisis, Politics | Bookmark

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