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The Green Lantern Theory of Financial Regulation

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When evaluating the financial regulation package, it would be useful if people were a bit clearer when distinguishing between "what the administration thinks about the financial sector" and "what the administration thinks it can get through Congress."

There's a tendency, for instance, to suggest that the White House is worried about angering Wall Street. This is Joe Nocera's take in the New York Times. "If Mr. Obama hopes to create a regulatory environment that stands for another six decades," says Nocera, "he is going to have to do what Roosevelt did once upon a time. He is going to have make some bankers mad." Over at the New Republic, Noam Scheiber concurs.

Elsewhere, Simon Johnson offers up three hypotheses for how the administration developed these proposals: None of his options include the possibility that they were concerned with passing them through Congress.

But this is something akin to a Green Lantern Theory for financial regulation: It suggests that it is fundamentally a question of the administration's will. But I don't see much evidence of that: The administration supported the "cramdown" legislation that would have given judges more power to help consumers keep their homes. Banks didn't like it, and they defeated the provision in the Senate. "The banks," said Sen. Dick Durbin, the Illinois Democrat behind the cramdown efforts, "are still the most powerful lobby on Capitol Hill. And they frankly own the place." In other words, even when the administration was willing to make the bankers angry, they lost.

Now, it may be that both the executive branch and the legislative branch are overly solicitous of the financial sector. But the question then is whether Timothy Geithner and Larry Summers and Barack Obama developed a regulatory proposal that's actually less aggressive than Congress would prefer. And I don't see much evidence of that. One way to test it, of course, would be to ask if you think Congress will make this legislation substantially stronger of its own accord. And I've not heard anyone predict that as a likely outcome.

Photo: Timothy Geithner meets with members of the Senate Banking Committee. Credit: AP Photo/Susan Walsh)

By Ezra Klein  |  June 18, 2009; 12:19 PM ET
Categories:  Financial Regulation , Solutions  
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Comments

Simon Johnson, at times I feel, is becoming another Noam Chomsky from MIT – a critic in his own right; but with diminishing contribution to the fruitful discourse. More on that on the blog: http://www.21stcenturypolitics.com/

Yes, I would concur with Ezra; Financial Regulation Reform package from White House is fairly robust. When one excludes the superlatives lavished by White House in praising it, there is a reasonable substance in that.

We will remember Consumer Protection Agency as the Obama legacy. It will be a fair achievement to be proud off; nice, positive politics there.

Posted by: umesh409 | June 18, 2009 12:50 PM | Report abuse

But the administration *didn't* press the issue on the cramdown provision and were conspicuously absent from the congressional negotiations. Maybe it wouldn't have passed anyways, but they need to start at least trying to be tough on the banks and applying some pressure on congress.

Posted by: adamguetz | June 18, 2009 1:11 PM | Report abuse

You were half-right. It was defeated in part because Obama didn't go to the well for it like he just did for the War Supplemental. If he had personally lobbied members of Congress for Cramdown, I bet he would have gotten it.

Posted by: Calvin_Jones_and_the_13th_Apostle | June 18, 2009 2:09 PM | Report abuse

I find it slightly ironic that, in light of the "green lantern theory", the (alleged) failure of financial regulation in the US can be linked to a lack of willpower, with the obvious rejoinder that what is required is the "triumph of the will". Wasn't that another Depression-era experiment in government policy-making? How did that work out again?

Posted by: acstaples405 | June 18, 2009 8:32 PM | Report abuse

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