Struggle for Financial Reform in the Senate

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While Congress prepares for an up or down vote on what amounts to the Senate Health Care Bill, financial regulatory reform is running into flack on all sides in the Senate. Republicans oppose much reform and virtually anything the Obama Administration proposes, while too many Democrats waver like reeds in the wind.

The House version for financial reform was much along the line of what the Obama Administration has requested but, after top Republicans met in December with bank lobbyists to coordinate their campaign against financial reform, it has been tough sledding in the Senate.

Where matters stand now is Senator Dodd is about to reach a break-through deal with Sen. Bob Corker (R.-Tenn.) representing the Republicans, to propose the creation of a new consumer protection authority to be housed inside the Federal Reserve, according to three sources familiar with the negotiations.

Under the tentative deal, the proposed protection agency's members would be appointed by the president, with a dedicated source of funding and the power to write rules, but enforcement of those rules would remain the responsibility of banking regulators. No surprise there on the latter point.

Paul Krugman has argued that without a new and strong agency to protect consumers from Wall Street financial predators, it is better to have no such agency at all. As he puts it:

There are times when even a highly imperfect reform is much better than nothing; this is very much the case for health care. But financial reform is different. An imperfect health care bill can be revised in the light of experience, and if Democrats pass the current plan there will be steady pressure to make it better. A weak financial reform, by contrast, wouldn’t be tested until the next big crisis. All it would do is create a false sense of security and a fig leaf for politicians opposed to any serious action — then fail in the clinch.

I agree. Consumers need real financial protection. As the late Edward Gramlich explained in back in 2007 when Greenspan was blocking regulations,

Why are the most risky loan products sold to the least sophisticated borrowers? The question answers itself — the least sophisticated borrowers are probably duped into taking these products.

But is an agency in the Fed insulation enough from lobbyists and naysayers? I suspect not, with the likes of a Greenspan at the helm. If the Fed would protect the prerogatives of such an internal agency, that is another matter. Krugman disagrees here, arguing the agency must be wholly independent of the Fed or the Treasury. I disagree.

A wholly independent agency is more apt than any to be bought off or unduly influenced than one inside of the Fed, I would think, where lobbyists’ access might be more limited. An independent agency in the Fed seems to be the best option to me, but the emphasis is on the independence of the agency – no reporting to or under the thumb of the Fed per se. But that is what the new deal proposes here, if it can be finalized.

The problem of no black letter law passed by Congress and rule making authority vested in men who can be unduly influenced and bought off remains. But that fight seems to have a foregone conclusion, in my view. We are not going in with bright red letter law by Congress by using such an agency.

We proceed much more by touch and feel. This remains a problem in my view, but no one is seriously addressing it. Hopefully, the agency itself will be quick to establish clear and concise rules and regulations that are needed to be enforced and not fumble around waiting for the immediate need to arise to enact one or another regulation.

Disclosure: No positions