Is Banking Reform Effectively Dead?

Bloomberg reports that the Obama administration's emphasis on health care reform and climate control will likely push bank reform and re-regulation to late 2010, just in time for election-year grandstanding. One year doesn't seem like a long time, but politics is about momentum and we Americans have a habit of jumping from one national fixation to another. (Remember, 12 months ago, we were worrying about whether algae blooms and toxic smog would totally ruin the Olympics.) As we speak, popular resentment toward the banks on Capitol Hill and Main Street is ripe and ready for plucking. A year from now, it will be moldy, smelly and stashed away in the refridgerator compartment where you hide lumpy fruit that didn't make last week's fruit salad. In other words, this won't kill the will for financial reform, but it could turn the will into mush.

Tomorrow President Obama will announce a new dawn for financial regulation, which will likely turn the Federal Reserve into a "free safety" that can hover above the national bank system, pick off violators and plug up any holes it sees to block systemic risk. Bloomberg also reports that the SEC could get new powers to catch future Madoff's.

But in many ways, this announcement is coming months too late. As Matt Yglesias has pointed out multiple times, our steadfast willingness to suppy the banks with any capital they needed was a double-edged sword. On the one hand, we gave investors and shareholders confidence that we would never let another major bank fail. That, more than anything, might have saved us from a 1930s redux. On the other hand, since everybody knew we wouldn't let another major bank fail, we missed our chance to rein in executive compensation (see Geithner's disappointing plan here) and other regulatory reforms. From the story:

Obama's regulatory proposals may be scaled back because lawmakers and the public perceive the financial crisis has abated and support for more aggressive options has faded, said Peter Solomon, founder of investment bank Peter J. Solomon & Co.

"Regulation's going to be the same thing," said Solomon, 70, counselor to the U.S. Treasury in the Carter administration. "There's really been no fundamental change; there's been a papering over, and this is it again."

Sounds like you can add another batch of months to that abating support for more aggressive options. This year's executive pay will be next year's algae blooms. To be sure, this isn't entirely a bad thing. It's possible that excessive anger at the banks could have led to legislation that excessively regulated the banks -- further manifestations of Congress' knee-jerk reaction to tax bonuses at 90 percent, and the like. But most economists are in agreement that deregulation went too far during the 1980s, 1990s and 2000s, and now we're in danger of letting the banking crisis go to waste.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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