SEN. Christopher Dodd, chairman of the Senate Banking Committee, has offered a sweeping bill designed to bring stronger oversight and regulation to the financial industry. The Financial Stability Act of 2010 aims to prevent banks and investment firms from repeating the national and international economic catastrophe that emerged a year and a half ago.
We can only hope.
The House of Representatives passed its own wide-ranging measure three months ago. Pledging support for a legislative fix, President Obama has said that the Dodd proposal would provide "a strong foundation to build a safer financial system." His statement noted that the economic crisis has resulted in the loss of 8 million American jobs, trillions of dollars in household wealth, and access to credit by small businesses.
Nonetheless, the Democratic senator from Connecticut noted that although he had taken much time and effort to include Republican input in the legislation, he does not have the votes right now to pass it. What he meant was that likely Republican opposition would suggest that the only way to get the bill through the Senate would be the majority-vote reconciliation process. Democrats are one vote shy of the 60 they would need to overcome a GOP filibuster that would be used to block the measure's normal path.
The bill would address many of the ills that brought down not only the American economy but also those of some key European allies, such as Greece, Italy, Portugal, and Spain. In particular, it would deal with the "too big to fail" notion that, under the Bush and Obama administrations, forced taxpayers to bail out large banks and investment houses.
The measure would allow the government to dissolve large firms that are seen as a threat to the financial system. It would create a new consumer protection agency that would impose and enforce rules limiting the ability of banks and other financial firms to take advantage of customers with payday loans, subprime mortgages, and other instruments.
It would separate banking from dealing in hedge funds. It would bring transparency to derivatives and other tricky maneuvers that got financial houses and banks in trouble.
The one substantive problem with the Dodd package is that it fails to rein in the role of the Federal Reserve in overseeing banks and investment houses. In the fall of 2008, the Fed didn't do its job, in part because of an overly cozy relationship with the financial sector.
On balance, the package is an improvement over present law, but prospects for passage are uncertain. Republicans are opposed, as are some Democrats. Well-heeled banks and financial houses are no supporters; they'll employ hundreds of lobbyists in Washington to try to block it by influencing lawmakers.
The financial industry cannot be permitted to carry on as it has, taking big chances on risky maneuvers to reap enormous profits, while expecting taxpayers to bail them out when they get into trouble.