The Money Man's Best Friend
The Blue Dogs claimed they were speaking for business, not bankers, but this too involved a little sleight of hand by industry lobbyists. Last summer, an official of the Securities Industry and Financial Markets Association told colleagues at a private industry meeting that since the bankers have damaged credibility in Washington, they should send their customers to push the bankers' position on Capitol Hill. Sure enough, representatives from various industrial and agricultural sectors showed up to testify as expert witnesses and demand exemption from regulation as the "end users" of derivatives. Bankers told their clients that regulation would raise their costs. Never mind the costs to the country if derivatives blow up again.
The ploy seems to have worked. The exemption for "end users" contained in the committee's final legislation is a major loophole--so vaguely defined it exempts insurance and mutual funds and might even be construed to protect hedge funds and private-equity capital from the disclosure of trading derivatives on public exchanges. Some committee members know very well they failed to eliminate crucial exceptions. Frank's commitment to reform is in question, since he voted for the original deregulation of derivatives in 2000. Now he says he wants to offer strengthening amendments when the bill comes to the House floor for passage. He has asked regulators at the SEC and the Commodity Futures Trading Commission to recommend ways to close loopholes "to prevent speculators from masquerading as end-users."
The odor of money hovers over the Blue Dogs--political money for their next campaigns. The House Financial Services Committee is a prized assignment and known informally among members as a "money committee," not because it deals with money issues but because its members have an easier time raising campaign funds from the banks and financial firms under their jurisdiction. This is not illegal. It is the way Congress works.
Money also explains why the committee is top-heavy with Blue Dogs. House Speaker Nancy Pelosi put them there, along with other freshmen and sophomores, knowing it can help them win re-election. She was encouraged by Representative Rahm Emanuel, now White House chief of staff, who was then chair of the Democratic Congressional Campaign Committee. In 2006 and again in 2008, Emanuel had a lot to do with electing Blue Dogs to House seats the Democratic Party was not supposed to win--suburban and rural districts normally represented by Republicans. Emanuel recruited candidates, coached them and financed them. They helped Democrats win control of the House and helped Pelosi become Speaker. Many of them face tough re-election fights in 2010 and need to raise a lot of money to survive. Naturally, party leaders worry about keeping them.
These more conservative junior members, one might say, are the tail wagging the committee's older, more liberal dogs. The Democratic Party is stuck with the consequences. It is a reform party that wants to have it both ways--serving the public interest without overly discomforting the bankers. The dilemma poses a test for Pelosi: will she stand with her favored Blue Dogs or go with the progressive/liberal majority of Democrats who want to solve the problem?
The House legislation essentially reflects the strategic choice President Obama made about financial reform. He wants to rearrange the regulatory system in Washington, but he does not want to alter the fundamental structure of the financial system or prohibit banking practices known to be dangerous. Instead of proposing hard rules and specific limits on bankers, the president would empower the regulatory agencies to keep watch and put the Federal Reserve in charge of guarding against systemic risk. Advocates of this approach argue that lawmakers do not know enough to write legislative commandments. There is some truth to that, but why imagine that regulators know what to do? Or that they will have the nerve to impose tougher rules that Congress declines to enact?
The Fed, in particular, failed utterly to see the developing crisis in advance or to listen to warnings from those who did. Again and again during the last twenty-five years, the Federal Reserve worried privately about banking excesses but never stepped up to restrain the reckless behavior until it was too late. Then, in crisis, the central bank rushed to the rescue and bailed out the largest of the bad actors.
But skepticism is rapidly gaining momentum in Congress. The most noteworthy critics of Obama's relatively limp reforms are two former Federal Reserve chairmen--Paul Volcker and Alan Greenspan--who in different ways recommend far stronger actions to correct things. Volcker wants to peel back a generation of permissive deregulation and restore the traditional format in banking: prevent commercial banks, whose deposits are insured by the government, from taking risky adventures in financial markets. Do not give more responsibility to the Fed, so it can focus on its core function--the conduct of monetary policy.