The financial regulation bill may be in danger in the Senate. The three centrist Republicans, whose votes were relied upon to get the 60 needed to prevent filibuster when the bill first passed in May, are now uncomfortable with the legislation. Senators Scott Brown (R-MA), Olympia Snowe (R-ME), and Susan Collins (R-ME) are all unhappy about a $19 billion tax on banks and hedge funds imposed in the wee hours of Friday morning in the conference committee. Because the House must pay for any new spending, it had to offset the cost of the new regulation, and decided sticking financial firms with the check was the best option.
The Dodd-Frank bill includes a broad new regulatory framework. It calls for countless studies, a new systemic oversight body, a new consumer financial protection bureau, and other costly measures. As a result, it should come as no surprise to anyone who has spent more than a day in Congress that it would involve additional government spending -- and a lot of it. In this case, the total cost will be around $22 billion over ten years, according to the Congressional Budget Office. Some of that is covered internally by the bill, but Congress must pay for the other $19 billion or so.
While it's almost cliché for Republicans to complain about new taxes, in this case it's rather bizarre. They must have known that this bill would involve additional government spending. So where did these Senators expect this money to come from when they voted for the bill initially? Here are the possibilities:
Now that the Republicans are the party of fiscal responsibility, they certainly couldn't have wanted to raise the debt ceiling to pay for the bill. Given their current strategy, the last place Republicans want to find themselves is on the side of a bigger deficit. After all, they even helped to block extending unemployment benefits recently for the sake of fiscal frugality.
The Federal Reserve Prints Money
Even though money doesn't grow on trees, it does get printed by the central bank. But surely Republicans didn't expect, or want, the U.S. government to inflate its way out of the cost of this regulation. Traditionally inflation hawks, Republicans wouldn't have preferred this method.
It's fairly likely that these Republicans might have wished that spending cuts balanced the additional spending on financial regulation. Yet, this is a Democratic bill in a Democratic Congress. Were they really naïve enough to believe that those who crafted the bill intended to cut billions of dollars form the federal budget to pay for it? You have to hope that these centrist Republicans have a strong enough grip on the reality of politics to know that wouldn't happen.
And that only leaves raising taxes. There's no other way Republicans could have reasonably expected the bill to be paid for. Frankly, taxing the financial industry instead of all Americans will probably make the tea partiers pretty happy, so at least there's that. As a result, it's hard to imagine how the situation could have come out much more favorably from their point-of-view, given the obvious fact that this bill would cost a lot of money.
These Republicans may very well be right to fear that a tax on financial firms would harm the economy, particularly as the credit markets continue to recover. But they should have thought of that before voting in favor of an expensive new regulatory package.