The politics of reform are, of course, convoluted. But Paul Krugman worries that this time it's a bit more than we are usually prepared to handle: So here's the situation. We've been through the second-worst financial crisis in the history of the world, and we've barely begun to recover: 29 million Americans either can't find jobs or can't find full-time work. Yet all momentum for serious banking reform has been lost. The question now seems to be whether we'll get a watered-down bill or no bill at all. And I hate to say this, but the second option is starting to look preferable. The problem, not too surprisingly, lies in the Senate, and mainly, though not entirely, with Republicans. The House has already passed a fairly strong reform bill, more or less along the lines proposed by the Obama administration, and the Senate could probably do the same if it operated on the principle of majority rule. But it doesn't — and when you combine near-universal Republican opposition to serious reform with the wavering of some Democrats, prospects look bleak. How did we get to this point? And should reform advocates accept the compromises that might yet produce some kind of bill? Compelling questions. The former will likely be overlooked by many, forgotten by others, and, if ever answered, relegated to obscure, dusty shelves of university libraries. The latter is more apparent, though likely to be represented quite simply in American political discourse. Still, much opposition to financial reform is seemingly based on a populist pipe dream. Many opponents of the House version of banking reform present their position as one of principle. House Republicans, offering their alternative proposal, claimed that they would end banking excesses by introducing "market discipline" — basically, by promising not to rescue banks in the future. But that's a fantasy. For one thing, governments always, when push comes to shove, end up rescuing key financial institutions in a crisis. And more broadly, relying on the magic of the market to keep banks safe has always been a path to disaster. Even Adam Smith knew that: he may have been the father of free-market economics, but he argued that bank regulation was as necessary as fire codes on urban buildings, and called for a ban on high-risk, high-interest lending, the 18th-century version of subprime. And the lesson has been confirmed again and again, from the Panic of 1873 to Iceland today. (ibid) The Nobel-winning economist and unabashed liberal offers something of a balanced critique of the Republican oppositional strategy, and suggests that, while some might be persuaded to sign onto a weak excuse for reform, Democrats ought not go in that direction: 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. (ibid) It is better in such cases, Krugman suggests, to fight instead of compromise. And while his example of the proposed Consmer Financial Protection Agency might seem a fallacious example— Is it important that this protection be provided by an independent agency? It must be, or lobbyists wouldn't be campaigning so hard to prevent that agency's creation. (ibid) —the point is not so easily dismissed: And it's not hard to see why. Some have argued that the job of protecting consumers can and should be done either by the Fed or — as in one compromise that at this point seems unlikely — by a unit within the Treasury Department. But remember, not that long ago Mr. Greenspan was Fed chairman and John Snow was Treasury secretary. Case closed. The only way consumers will be protected under future antiregulation administrations — and believe me, given the power of the financial lobby, there will be such administrations — is if there's an agency whose whole reason for being is to police bank abuses. (ibid) As such, Krugman proposes that "it's time to draw a line in the sand". But what does this actually get us? After all, as Bill Maher suggested last year: So, what we have is one perfectly good party for hedge fund managers, credit card companies, banks, defense contractors, big agriculture and the pharmaceutical lobby; that's the Democrats. Can the current crop of Democrats suddenly turn on heel and conduct themselves with credible principle again? In the dramatic or narrative context, sure. In the practical, however, it's not an easy task. With so few genuine liberals in Congress these days, the Democrats could just as easily draw a line in the sand and demand a "reform" giveaway to the banks. But what is the alternative? More faith in the noble spirit of the greedy? If the Democrats are to draw a line in the sand, it needs to be a useful one. Who cares if we estabish a CFPA, if it's neutred at the outset? It's not as if the Democrats need to "accept a watered down version". They're perfectly capable of devising one on their own. ____________________ Notes: Krugman, paul. "Financial Reform Endgame". The New York Times. March 1, 2010; page A27. NYTimes.com. March 2, 2010. http://www.nytimes.com/2010/03/01/opinion/01krugman.html Maher, Bill. "New Rules". Real Time With Bill Maher. HBO, New York. June 19, 2009.
