The Dodd Bill—the financial reform package currently under consideration in the Senate—is a sterling illustration of the old cliché that sometimes it's worse to miss by an inch than a mile. The provisions for handling large financial institution failures have progressed a great deal from last summer’s Obama administration proposal. They borrow a lot more from the bankruptcy laws, for instance. And there’s a lot of tough talk about ending too big to fail and harsh medicine for large financial institutions that stumble. But the framework has more than enough wiggle room for bank regulators to bail out creditors as they did in 2008, and it gives them a $50 billion pot of cash to do it with. The end result is as bad, and could even be worse, than the original, for reasons described in more detail in this op-ed from a couple of days ago.
The bill also resolves the debate over whether to establish a Consumer Financial Protection Agency to police credit cards and mortgages in a strange way. The Dodd Bill does call for a new consumer watchdog—a good thing, in my book-- but would stick it in the Federal Reserve. The Fed focuses on protecting the banking system, which often benefits from credit card and mortgage terms that may hurt consumers. If the watchdog is sufficiently independent, the arrangement might work. But the proposal seems to invite lots of cognitive dissonance within the Fed.
If I were a lawmaker and were forced to vote today, the resolution provisions would put me squarely in the no category. But if I were a Republican lawmaker, the last thing I would do is commit myself to opposing any financial reform package that emerges from Congress. The politics of financial reform seem very different than the healthcare debate, as I’ve argued before, given the distaste for bailouts on both sides of the political spectrum. If the Dodd Bill were amended in ways that really made good on the claims to end too big to fail and to reduce the need for bailouts, it might be worth voting for. But we definitely aren’t there yet.