What the 111th Congress has done -- and what it still has to do

The Restoring American Financial Stability Act of 2010 -- that is to say, the financial-regulation bill -- passed the Senate last night. That adds one more achievement in what has been an extraordinarily productive Congress. Since Barack Obama's inauguration, we've seen passage of the $800 billion stimulus bill, the most significant health-care reform bill since the establishment of Medicare and Medicaid, the most far-reaching financial-regulation bill since the Great Depression, numerous jobs bills, Ted Kennedy's SERVE America Act, tobacco-regulation legislation, and credit-card regulation legislation. The process has felt slow, and the products have been imperfect, but the impression of sclerosis is not matched to the reality of the Congress.

That list if anything, understates the 111th Congress's productivity, as some of the larger bills included secondary provisions that would've been massive achievements if they'd passed on their own: Think calorie labeling at chain restaurants in the health-care bill, or the consumer financial protection agency in the financial-regulation bill, or any of a half-dozen infrastructure and technological-investment projects passed in the stimulus.

But if the sausage factory is making a lot of sausage, it's still making sausage. The financial-regulation bill gives regulators more power and better information, it collects oversight of all systemically important financial institutions in one institution dedicated to watching out for systemic risk, and it probably brings the derivatives market into the sunlight (see Mike Konczal for an explanation of the uncertainty). But the philosophy underpinning the policy is fundamentally a compromise with the status quo: Wall Street will work much as it does now, and regulators will be asked to keep a closer eye on its doings.

Legislation like this could intervene at one of three crucial points: The first is before a problem can builds. That would require fundamentally changing the nature of Wall Street so that banks cannot take so many risks, or so that the risks they do take would not pose as much of a threat to the system. But the bill doesn't do any of that. The second point is while a problem is building. The derivatives portion and the systemic-risk regulator are both efforts to give regulators enough information that they can effectively act to solve a problem before it turns into a panic. If the derivatives portion is good enough -- and that remains a big if -- the bill may do quite a lot on this front. And the third point is after a problem becomes a crisis. And that's where the bulk of the bill focuses, giving all sorts of regulators all sorts of power to intervene when once they understand something has gone awry.

But I'm skeptical. The bill asks the very institutions that failed us last time -- and that have failed again and again throughout history -- to regulate banks that are even bigger now than they were before the crisis, and that are not confined by simple rules governing the amount of capital they have on hand or simple taxes that make risk and bigness undesirable. Take resolution authority. Before a risky firm can be brought down, the Treasury Department, the FDIC, the Federal Reserve and three bankruptcy judges have to all sign off. If anyone refuses to go along, resolution cannot be used. It is easy to imagine a bank effectively lobbying, say, a Treasury secretary for more time. It is hard, conversely, to imagine so many players agreeing on something as difficult as destroying a major financial firm before we're officially in a market-recognized bank run.

Like with health-care reform or stimulus, what we have here is a major achievement and a clear step forward, but an insufficient solution to a problem that will continue to dog us. And so the question is not just what the 111th Congress did, but whether the process has educated the members who will continue onto the 112th and 113th and 114th Congresses and has persuaded them to keep paying attention to these issues and to continue building on their legislation.

Photo credit: Bloomberg News.

United States Congress - United States - Politics - Wall Street - Health Care Reform