Bank Reform Kick Off … Sort Of

Here we go again.

Let the partisan sniping begin.

Despite protestations to the contrary the Republicans blocked debate on bank reform today. The reason? “This is not something that should be rushed”.

Ummmm.

The two parties have been engaged in close quarters combat for at least two months. Senators Dodd and Shelby have been virtually living together as they seek to thrash out a bi-partisan deal.

And.

The financial crisis hit us full force two years ago. That’s tons of time to reflect and get a response ready. Frankly, if the GOP hasn’t got any ideas together in the time since Lehman imploded and AIG was bailed out, both of which happened on George Bush’s watch – yes it was that long ago – then I doubt they will ever get any ideas together.

The problem for the Republicans is simple. They are the party of deregulation and free markets at a time when deregulation and free market theory has been debased and disproven by the actions of the big banks. They are on the wrong side of history. It is the obverse of their position back in the early Reagan days when anyone advocating deregulation and freeing up markets was hip and cool. Now they are passe and reactionary.

Getting from their deregulation trench to a better position is tough when that better position is well occupied by the Democrats.

Hence the brickbats.

And the hissy fits.

Last week was a great illustration of the political bind the GOP finds itself in.

Mid-week Mitch McConnell yelped about how he will oppose bank reform all the way. He looked like a man on a mission: no more bail-outs he yelled.

Within two days he was overwhelmed by the Goldman scandal and the obvious trickery of the big banks he had set out to defend. Goldman may or may not have committed fraud, but it sure looked unethical. Plus it announced enormous profits and ever increasing bonus pools for its already overpaid staff. This is probably not an organization a politician wants to expend too much time defending this fall in the elections. All of a sudden the GOP found itself about to be stranded on an island along with Wall Street. Not a good place to be when the public looks at Wall Street with such a jaundiced and angry eye.

So McConnell had to walk back his stridency within two days.

So his next trick was to claim that he had won the argument, and that he had forced the White House to concede some points on the proposed legislation. Specifically he pointed to the administration’s willingness to bargain away the bail-out tax on banks. Except that no one ion the Senate had suggested that bargain, and the current legislation still includes the very tax McConnell says he successfully rid it of.

Oh well.

After the Goldman scandal broke, a variety of GOP senators broke ranks and made it clear that they would not support a filibuster against the legislation. That seemed to clear the decks for debate. The bill is sitting on everyone’s desks for their edification. Discussions are ongoing about the details. Dodd and Shelby still cling to each other. Compromise is in the air.

Until later today when the GOP decided to go back to being the party of ‘no’.

So here we go again.

Health care redux.

Except that the Democrats seem to have learned not to waste time waiting for the likes of senators Collins and Snowe to decide whether they like the legislation. Instead they have announced that the vote is imminent – probably Monday.

All this huffing and puffing will undoubtedly take a few wrong turns before we actually get a vote. But it now looks likely that we will have bank reform fairly soon.

Is that good?

Well … it’s better than nothing.

The proposed legislation is a vast improvement over where we are today. Particularly when the bill that came out of the Senate Agricultural Committee is combined with it – that bill beefs up regulation over derivatives and will cause intense pain to the traders who benefit from doing deals in the murkiness of non-public and opaque corners of the erstwhile market. Nonetheless, we should all contain our enthusiasm. This legislation, even if it isn’t watered down by the bargaining now underway, is not sufficient to prevent another financial melt down. It is the beginning, not the end, of what I think will be long series of legislative efforts to put the financial genie back in its pre-deregulatory bottle.

The simple goal is to get banking to be socially responsible again. That means draining it of profit. Containing its excesses. Reducing our subsidy of it. Limiting the damage each bank can do. Cutting it down to size with respect to the economy. And above all else, stopping it sucking capital away from the ‘real’ economy. Don’t forget: banks are supposed to channel capital towards the best opportunity for profit. Not just for the traders, but for all of us. That means the banks need to get back to being banks, and get away from being deal makers, traders, and gamblers.

The old watchword for Goldman Sachs was that it should be ‘long term greedy’. That is to say it should be willing to sacrifice short term gain in order to secure the best long term profit. But banking, including Goldman, has become ‘short term greedy’. Banking should about building those long term relationships that create symbiotic profit opportunities both for the bank and its clients. It should not be about a dog-eat-dog brawl in which the only goal is today’s best deal. I realize this takes the macho gloss off Wall Street, but, hey, who said banking should be fun? It isn’t.

Bank reform needs to re-draw the financial map so that the industry is forced back to doing banking, and is severely – very severely – limited. The current legislation does too little to accomplish that. But at least we appear to be setting off on the journey.

It will be interesting to watch the Republicans as they adapt to this new world.

I hope they do. We need all the help we can get if we are to prevent another banking melt down.