The flailing negotiations on the Senate Banking committee have reached the point where reductio ad absurdum appears to be the strategy. Recall that one of the big problems before the financial crisis was that the Federal Reserve, whose main job is monetary policy, and whose secondary job is bank regulation, also had the broadest authority to regulate consumer finance. When it didn't use those authorities, reformers made the (correct) assessment that consumer financial regulation would only be effective if it could be housed in an independent agency.
Republicans and some moderate Democrats objected to that plan because an independent agency might actually change the lending system to protect consumers. After a series of compromise proposals, Senate Banking Committee Chair Chris Dodd has now hit upon a new plan: Put consumer financial protection authority back in the Fed.
Oy. Reports suggest that this is a Republican proposal, and that doesn't surprise me. Thanks to the Senate's hostility to the Fed, the broader regulatory overhaul strips the central bank of its prudential regulatory powers and gives Treasury the lead role on systemic risk regulation, making the consumer financial protection agency's potential new home a backwater.
There are also apparently agreements about dissolution authority whose details remain unclear, so it's hard to evaluate if there were serious policy losses in that area; nor have other controversial topics, like derivatives, been raised. Of course, all of this negotiating with Republicans is predicated on the idea that they'll filibuster a financial regulatory overhaul they don't like, but that seems like a misreading of the politics of the situation. Will Republicans really filibuster this legislation? I doubt it. It seems more and more likely that the financial reform bill will be both poorly constructed and only have a few GOP votes (none other than Corker is involved in negotiations). This comes thanks to opposition from Corker and other senators who haven't been identified, which makes it very difficult for reformers outside of Congress to pressure them toward better policy.
-- Tim Fernholz
