Last year, in a landmark essay, economist Simon Johnson observed that the dynamics of the financial crisis made the United States look more like an emerging market economy, with all the rampant crony capitalism and corruption that entails, than a developed country with an efficient, modern financial market.
"Elite business interests -- financiers, in the case of the U.S. -- played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse," Johnson wrote. "More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed, and fast, to pull the economy out of its nosedive. The government seems helpless, or unwilling, to act against them."
A year later, with the government poised to overhaul the financial system, this analysis doesn't seem quite correct, or, if you will, Congress looks likely to prove it decisively wrong.
While the bailouts of 2008 remain firmly fixed in everyone's mind as an object lesson in least-worst-choice policy-making, the financial rescue has been cheaper than almost anyone dared imagine, and a special tax proposed by the Obama team is likely to make the cost zero. Since the president came to office, more money has been spent to protect average citizens than to aid the financial sector. In the next few weeks, our legislature has the opportunity to make sure that we have a much safer banking system and a diminished chance that bailouts will ever occur again.
Johnson's thesis hinges more on a political analysis than on an economic one. The sheer size of the financial sector in our country gives it extraordinary political power to lobby and confuse; if that power can distort or prevent egalitarian policy-making, then the system is corrupt. But if popular outrage and commonsense policy-making outweigh the financial interests of the few, we're not post-Soviet Russia after all.
Consider the state of financial reform: The bill currently before both houses would dramatically change the way regulators examine the market and enforce rules; new protections for consumers, higher standards to control risk, and specific mechanisms to stop bailouts and wind down failing firms without harming the rest of the economy.
A conservative Democrat from Arkansas, Sen. Lincoln Blanche, wrote into the bill sweeping derivatives-reform provisions that would force complex financial instruments into the open and force banks to take responsibility for their failure. She has also proposed banning derivatives trading from federally insured banks, a move that could radically reshape the industry.
You even have financial-sector lobbyists complaining about the bill, which, for some critics, is the only worthwhile litmus test for determining if it is a success. Well, courtesy of The Washington Post, here you are: Lobbyists call the bill "draconian," "crazy," "insanely unproductive."
Perhaps most important, though, is a parade of amendments to the bill that will be taken up by the Senate. The best of these amendments are designed to strengthen the bill, and they are gaining votes and political momentum. The most critical is a plan from Sens. Ted Kaufman and Sherrod Brown that would cap the size of the financial sector and break up the largest banks.
"We broke up Standard Oil, we broke up AT&T, we broke up the accountants, too," Kaufman told me last week. "When you look at the reasons these banks are so big -- and you know how big they are -- remember the reason JP Morgan Chase is so big is because they bought Washington Mutual when it was in trouble, and Wells Fargo bought Wachovia, and Bank of America bought Merrill Lynch [during the crisis]. It is pretty straightforward, now that these are back on their feet, that it makes sense to break them up."
There are others: One from Sens. Jeff Merkley and Carl Levin that would force banks to give up speculating with their own money and get out of the hedge-fund business, another from Sen. Jack Reed to put new consumer-protection authorities in an independent agency, and a third from Sens. John McCain and Maria Cantwell to reinstate a New Deal-era law, Glass-Steagall, that separates commercial banking from riskier investment banking. Sen. Bernie Sanders wants to include a provision that would allow the Federal Reserve to be audited. A victory by some or all of these amendments would greatly improve the Wall Street overhaul.
It's a far cry from the inaction some observers predicted, and certainly a departure from last year?s failure of the Obama administration to support a modification in bankruptcy law that would have made it harder to foreclose on troubled homeowners. The bill failed without support from the executive branch, but both White House and Treasury officials learned a lesson and are pushing hard to pass this bill.
When asked whether the bill will pass, knowledgeable Hill observers point to last May's Senate vote to stop credit-card companies from jacking up rates and abusing consumers with surprise fees and tough-to-understand contracts. The bill, which faced extensive criticism from the financial sector, ended up passing 90 to 5, providing an example of the political benefits to reining in the financial sector's pernicious practices.
This debate is still far from over -- there are several more opportunities for Republicans to filibuster the bill and kill it and for policy-makers on both sides of the aisle to water it down. Yet the advantage seems to be with the reformers. Even more than with the recent reforms of the health-care system, this legislation tests America's government. Will it be an oligarchy, as Johnson darkly foretold, or a Republic?
