The Legislative Process Versus Regulatory Reform.

Felix Salmon writes up a broad review of regulatory reform efforts, but I think his description of what Democrats in Washington have been trying to do over the last few months misses several key factors and ends up being too pessimistic. There are really only two main visions of regulatory reform for the Democrats, and there is a way forward. Let me explain.

The Treasury proposal that Salmon refers to as the basis of the House bill did indeed get changed, but it seems strange to refer to Barney Frank "tearing into" the proposal without mentioning that he was doing so only to get the CFPA passed at all -- and nearly lost it on the House floor, barely eking out a vote. While it's relatively easy to understand policy solutions to problems, it's very hard to pass them through a legislature where centrist Democrats are allied with the financial industry and the Republican political strategy of total opposition empowers those Democrats. The fact that the bill passed at all was a major victory.

Though important provisions in the CFPA did get removed, it hasn't ruined the the proposed agency -- Elizabeth Warren says Frank's version is still strong. On the specific issues Salmon mentions, experts say that while the new federal preemption standard and the enforcement exemption of community banks (who will still have to obey the CFPA's new rules) are not the best outcomes, both are better than the current regime.

Treasury officials who worked on the proposal believe their vision was pretty well enacted. The administration even appropriated some of the House's changes, consciously basing their plans for the new "Volcker rule" around amendments added to the bill by Reps. Paul Kanjorski and Brad Miller. Those discussions also began well before Scott Brown's victory, with Volcker getting Obama on board with a more aggressive approach as early as October; look for a longer history of Volcker's successful policy push here later this week. Even though Tim Geithner and Larry Summers weren't fans of Volcker's vision (they preferred, and Geithner endorsed, the Kanjorski amendment in the House), they haven't been marginalized -- they're still the ones crafting this policy and are using Volcker's ideas at the president's request. Ultimately, there's not a lot of daylight between the House, Volcker, and Treasury visions of regulatory reform at all, and the new proposals enhance what has already been planned in a reformist direction.

And what of Chris Dodd's ambitious plans? They do go further structurally than the administration proposal, but they don't differ significantly in philosophy, which gives legislative aides hope that the merging the two bills won't be an enormous challenge. Dodd has an even harder venue than Frank did for passing regulatory reform legislation, and really hasn't committed to anything yet because he's trying a different negotiating strategy than the president -- making the biggest ask possible so he can compromise more strategically. He's playing his cards very close to his chest -- while Frank endorsed Obama's new rules last week, Dodd merely said he would consider them. Nonetheless, instead of Salmon's four versions of regulatory reform, we really have only two -- the evolved House/Obama administration proposal, and the still-nebulous Senate proposal. On Friday, Kanjorski told me he thought the bill could be on the president's desk as early as March or April, although Democratic political strategists are expecting a bill by June.

It all comes back to health care -- that's the reason Dodd had been so delayed in negotiating his version of the bill, though it still took the House until December to pass their omnibus regulatory bill after beginning hearings in the summer. Unfortunately, it takes a long time to do a massive regulatory overhaul (look how long health care has taken, where there was much more institutional and policy support on the side of reform). It also comes back, as Salmon observes, to the administration's continually weak legislative strategy of putting their compromise out first.

On the issue of party discipline, I'm not sure Salmon conceives of the issue in the right way; party discipline only works when there is a clear political benefit for all involved (as when the principles and political incentives of Tom Delay's Congress aligned during the Bush years). But when reformers, broadly construed, lead a party containing legislators who benefit politically from delaying reform, and just a handful of them can exercise enormous power thanks to total Republican opposition, aligning incentives for them to support reform is very hard. But, according to several Hill sources, the president's announcement last week wasn't just about moving policy forward; it was also about drawing a clear line so that those in his party who would oppose reform understand that they are getting on the wrong side of the most popular Democrat in Washington. Hopefully, it's a first step toward getting everyone moving in the same direction.

-- Tim Fernholz

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