Health reform is the law of the land. Next up: financial reform.
But will it happen? The White House is optimistic, because it believes that Republicans won't want to be cast as allies of Wall Street. I'm not so sure. The key question is how many senators believe they can get away with claiming that war is peace, slavery is freedom and regulating big banks is doing big banks a favor.
Some background: We used to have a workable system for avoiding financial crises, resting on a combination of government guarantees and regulation. On one side, bank deposits were insured, preventing a recurrence of the immense bank runs that were a central cause of the Great Depression. On the other side, banks were tightly regulated, so that they didn't take advantage of government guarantees by running excessive risks.
From 1980 or so onward, however, that system gradually broke down, partly because of bank deregulation, but mainly because of the rise of "shadow banking": institutions and practices that recreated the risks of old-fashioned banking but weren't covered either by guarantees or by regulation. The result, by 2007, was a financial system as vulnerable to severe crisis as the system of 1930.
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Now what? We have already, in effect, recreated New Deal-type guarantees: As the financial system plunged into crisis, the government stepped in to rescue troubled financial companies, so as to avoid a complete collapse. And the biggest bailouts took place under a conservative Republican administration, which claimed to believe deeply in free markets.
There's every reason to believe that this will be the rule from now on: When push comes to shove, no matter who is in power, the financial sector will be bailed out. In effect, debts of shadow banks, like deposits at conventional banks, now have a government guarantee.
The only question now is whether the financial industry will pay a price for this privilege, whether Wall Street will be obliged to behave responsibly in return for government backing. And who could be against that? Well, how about John Boehner, the House minority leader? Recently Boehner gave a talk to bankers in which he encouraged them to balk efforts by Congress to impose stricter regulation. "Don't let those little punk staffers take advantage of you, and stand up for yourselves," he urged.
But Boehner isn't the problem: Barney Frank, chairman of the House Financial Services Committee already has shepherded fairly strong financial reform through the House. Instead, the question the Senate.
In the Senate, the legislation on the table was crafted by Sen. Chris Dodd of Connecticut. It's weaker than the Frank bill, and needs to be made stronger. But no bill will become law if Senate Republicans stand in the way of reform.
But won't opponents of reform fear being cast as allies of the bad guys (which they are)? Maybe not. Back in January, Frank Luntz, the GOP strategist, circulated a memo on how to oppose financial reform. His key idea was that Republicans should claim that up is down -- that reform legislation is a "big bank bailout bill," rather than a set of restrictions on the banks.
Sure enough, a few days ago Sen. Richard Shelby of Alabama, in a letter attacking the Dodd bill, claimed that an essential part of reform — tougher oversight of large, systemically important financial companies — is actually a bailout, because "the market will view these firms as being 'too big to fail' and implicitly backed by the government." Um, senator, the market already views those firms as having implicit government backing, because they do. The only question is whether we're going to regulate bankers so that they don't abuse the privilege of government backing. And it's that regulation that reform opponents are trying to block.
So it's the punks versus the plutocrats. Whatever they say, the fact is that people like Shelby are on the side of the plutocrats; the American people should be on the side of the punks, who are trying to protect their interests.
THE NEW YORK TIMES