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Thursday, December 16, 2010

How Will the GOP Regulate Wall Street?

Regulation is rarely flawless when it is first imposed. Adjustments are needed to make sure that the intent of the original legislation is carried out, and to plug any new holes that are discovered. However, any new regulatory initiatives will face a tough hurdle -- a Republican chairman of the House Financial Services Committee and Republican control of the House.

In fact, the battle will be to stop current regulatory initiatives from being watered down or eliminated. Democratic control of the Senate and White House should be able to prevent this from happening, and the outcome is likely to be a standoff. However, a standoff can still lead to watered down or ineffective legislation. Since there won't be any way to fix regulatory problems that emerge over time as the industry evolves and attempts to evade existing restrictions, or to fix new problems that are discovered, gridlock will work in favor of the banks:

This is how the GOP Congress will regulate Wall Street?, by Andrew Leonard: Rarely do you see a politician quite this honest: Last Wednesday, just hours after securing the position of chairman of the House Financial Services Committee, Spencer Bachus, R-Ala., told the Birmingham News that "in Washington, the view is that the banks are to be regulated, and my view is that Washington and the regulators are there to serve the banks."

In the very next paragraph, the newspaper reported that Bachus "later clarified his comment to say that regulators should set the parameters in which banks operate but not micromanage them." But the damage was already done. ...

The candor of Bachus' initial statement is eyebrow-raising, no doubt about it, but the fuss and bother over his revelation is a little bit disingenuous. ... Together with his fellow Alabaman Republican, Sen. Richard Shelby, the powerful ranking member of the Senate Banking Committee, he's part of a dynamic duo of market fundamentalist crusaders who will likely set the tone for how banking reform and regulatory oversight aimed at Wall Street are implemented for the next two years.

Immediately after the midterm elections were over, and long before his confirmation as chairman, Bachus got quickly to work on his anti-regulation agenda. The day after the election, in fact, Bachus sent a letter to the Financial Stability Oversight Council, that, as I wrote last month, was written as if dictated by bank lobbyists. His main target: the so-called Volcker rule...

Three weeks later, Bachus co-authored letters to the inspector general offices at the Treasury Department and the Federal Reserve, demanding detailed information about how the Consumer Financial Protection Bureau is being set up. ...

Let's recap: Who hates the Volcker rule the most? The banks. Who is most annoyed by the Consumer Financial Protection Agency? The banks. Whose agenda is Spencer Bachus already serving to the best of his ability? The banks'.

With a Democratic majority still controlling the Senate and Obama in the White House, Bachus and Shelby won't be able to completely subvert bank reform and gut regulatory oversight. But ... Alabama ... is set to exert a disproportionate influence on how Washington rides herd on Wall Street. ...

The most famous Alabaman to influence how Washington regulated Wall Street was probably Henry Steagall, whose name resonates through history from its inclusion as part of the name of the Glass-Steagall Act that separated investment and commercial banking for the better part of 60 years. Both Bachus and Shelby voted to repeal Glass-Steagall, and both of them have worked hard to make sure that the spirit of regulation birthed in the Great Depression, and revivified by the Great Recession, dies stillborn. Henry Steagall was no flaming liberal, but it is hard to imagine he'd be too pleased by today's Alabama agenda.

    Posted by on Thursday, December 16, 2010 at 02:34 AM in Economics, Financial System, Politics, Regulation | Permalink  Comments (22)


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