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It would seem there is never a politically convenient time to re-regulate the financial sector. That's one of the policy lessons from from Noam Scheiber's profile of White House Chief of Staff Rahm Emanuel. This bit about the administration's civil war over financial regulation is meaty stuff:

As early as the transition, according to several administration officials, Emanuel was adamant that reform of the financial sector proceed immediately. He insisted it simply wasn't politically viable to pump hundreds of billions of dollars into the banks without showing voters that they wouldn't have to ante up all over again a few years hence. Geithner objected that fast-tracking reform would only create more uncertainty and could paralyze the financial system. And there were legitimate considerations on both sides. But, suffice it to say, no one out to coddle the banks would have taken Emanuel's position.

Democrats want to regulate the banks for policy reasons, because it's important to them to discourage over-leveraging, strengthen our regulatory regime, promote clearer disclosure of risks for consumers of financial products, and generally prevent future calamities. But they also recognize -- or at least most of them should -- that politics is about finding enemies, and there's no more obvious enemy than a banking sector that brought about the worst economic crash in 60 years, received hundreds of billions of taxpayer dollars, and is now, with unemployment at 10 percent, paying individual bonuses that could feed middle class families for a decade!

You would think that taking it to Wall Street bankers (for whom the term "bloodsucking" is rote in the public discourse) would be an easy political sale. But it's not. Each argument about the political timing of financial regulation seems to answer itself with a reasonable objection:

--Do it early: we've just extended hundreds of billions of dollars to Wall Street in TARP money and need to show Americans we have sticks with our carrots! No, rushing regulation will breed uncertainty, freeze credit and hurt the stock market when it's already wallowing in the 6000s.

-- Do it methodically: let's have an open, lengthy debate about financial regulation! No, an extended debate will slow the momentum for real reform just like the health care debate sapped public will to support extending insurance. American's don't care about resolution authority, or where you lodge the consumer protection agency. They care about swift and clear vengeance.

-- Do it last: let's save it for late summer 2010, when anti-Wall Street rhetoric will stick in the minds of midterm voters! No, with the banks on firmer footing they'll flood DC with lobbyists and pour gazillions into Republican campaigns across the country to defeat the legislation and wipe Democrats off the map, and we might end up with nothing at all.

The conventional wisdom seems to have been that the policy of financial regulation is tough, but the politics is easy. I'm not so sure about that last part anymore.

(Photo: Flickr Creative Commons)


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