Stop Hyping Financial Reform

Last week, the Senate followed the House and passed a bill to regulate Wall Street, all but ensuring President Obama another major legislative victory. At moments like these, the Washington press corps drops its adversarial tone and adopts a witness-to-history earnestness.

Pronouncements are made about the historic nature of the new law ("The most profound remaking of financial regulations since the Great Depression,'' declared the Washington Post). The key figures, like Senators Blanche Lincoln and Christopher Dodd, are lionized ("Dodd Prepares to Depart in Triumph,'' blared The New York Times). All of this is routine and customary and to be expected. It's also lazy and misleading.

Like a good pulp thriller, the standard media narrative of any major law requires high stakes, a clear delineation between good guys and bad guys, and a satisfying resolution. But the truth about legislation, including financial reform, is usually more mundane.

Politicians tout modest reforms as being great ones. They act in their own self-interest. And they often can't gauge a law's effectiveness until years after the fact, though you'll rarely hear this. For the press, the tradition of "writing for history'' entails burnishing the story, and that often means subordinating what was really at stake and why the major figures acted as they did.

Three points in particular are likely to be underplayed. First, the new financial regulations are the most profound since the Depression chiefly because most of what Congress did in the interim was to eliminate regulations, which brought on the recent crisis. Nobody's clearing a very high bar.

Second, whatever Obama signs into law will be modest given the scope and severity of the crisis, nothing like the New Deal reforms. No bank will be broken up, no government agency punished, no Wall Street executive denied his bonus.

The thrust of both the House and Senate bills is to repair and preserve the current system rather than reform it root and branch. "The system isn't changing that much,'' Douglas Elliott, a Brookings Institution scholar and former investment banker told National Journal. "There is a hope, I think, that everyone is going to do better.''

Among the first to exhibit better behavior were the committee chairmen who drafted the Senate bill, Dodd and Lincoln. In a break from the Washington norm, the reform legislation got stronger, not weaker, as it wended its way through the Senate. This was especially interesting given that both senators spent years doing Wall Street's bidding. Their about-face added drama to the proceedings. That no senator in either party was willing or able to thwart them only made the story better.

The third point likely to be underplayed is that this unusual dynamic owes nothing to the integrity of the senators and everything to the anger of the American public. Dodd and Lincoln, both facing wrathful voters and long odds on reelection, simply were trying to survive (Dodd finally gave up and decided to retire -- sorry, "depart in triumph'').

It speaks volumes about the Democratic leadership's attitude toward financial reform that its two toughest bills have both been acts of blatant insincerity driven by electoral desperation. That a few members of the GOP, which would block Mother's Day if a Democrat proposed it, felt compelled to go along says as much about the power of an angry electorate. But that's really not so bad. Cravenness, it turns out, can be a force for good. "This bill has been a constant one-upping of people proposing stronger and stronger provisions,'' a Senate leadership aide marveled. "The dirty work of watering it down is dangerous, so it just keeps moving along.''

A few big issues remain when the House and Senate merge their bills in the coming weeks. Will the "Volcker Rule'' banning federally insured banks from making risky bets find its way into law? Will banks be forced to spin off their derivatives business? We may soon see for ourselves. Somewhere along the line, someone proposed televising the proceedings, and no one's summoned the courage to stop them. This is undoubtedly for the good. Fear and self-preservation aren't the most admirable qualities. They make for lousy copy. But they do seem to work. The real story of financial reform is that nobody wants to depart in triumph.

Joshua Green writes a weekly column for the Boston Globe.