More On The Politics Of Financial Regulation

Last week, I wrote about Congress' struggle to iron out the financial regulation details. Most of that post consisted of explaining the uphill battle that policymakers will have in the Senate, as things were going much more smoothly in the House. According to a New York Times article today, that's no longer the case: the House is now having some trouble of its own. And the real problems are within the ranks of the Democrats.

The House's version of financial regulation has already cleared the Financial Services Committee, but now it must pass a broader House vote. Republicans are unanimously against it. But Democrats don't need their approval in the House to pass a bill if they all agree to push it through. Such agreement is proving difficult.

The NY Times article breaks down all of the politics. Various Democrat coalitions have different ideas about what the legislation should and shouldn't look like. For example, the New Democrat Coalition, led by Rep. Melissa Bean (D-IL) doesn't want state bank regulators to be able to create stricter regulations than federal regulators. Party leaders Rep. Nancy Pelosi (D-CA) and Rep. Barney Frank (D-MA) have a different view. The Congressional Black Caucus demanded the bill to do more to assist the financial troubles of minority communities. Other more moderate Democrats are worried about creating a Consumer Financial Protection Agency.

Such politicking is resulting in compromises, because Democrats must be united to overcome the Republican opposition. An example of a compromise includes a provision to use $4 billion from the bank bailout fund to go towards low-interest loans to prevent foreclosure in low-income communities. All Democrat coalition concerns must be taken seriously to ensure that the bill has a chance.

The House will almost certainly end up passing something. But with all the compromising, I wonder how watered down and distorted the final legislation will look compared to what the committee proposed. And that's not even the real worry.

What should scare those in favor of financial reform even more is the battle in the Senate. If the House is proving to be this though, then the Senate will be a disaster. Remember, this bill still has to be reconciled with what the Senate Banking Committee has proposed. Then, somehow Democrat leaders have to sway their moderate brethren in the Senate to go for all of the measures, many of which businesses find troubling.

I can't stress enough what a big mistake Democrats made by waiting so long to get this regulation passed. As they focused on health care, the chorus of criticism towards new regulation from business and bank lobbyists grew louder and louder as the economy began to show signs of recovery. Getting this legislation through last spring would have been far easier than it will be next spring -- when something is expected to finally pass. And now, whatever that is will almost certainly have far less bite than it would have a year earlier. I just hope what we get is strong enough to prevent another crisis and more bailouts.