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

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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 to 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.

And 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 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.

By Ezra Klein  |  May 21, 2010; 9:51 AM ET
Categories:  Financial Regulation  
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Comments

On the list of major things, you forgot Student Loan reform. Never thought that one would actually pass!! Very happy it did! Paying ed loans for my wife for 10 years now. Not pretty. Anything that helps new people going to college is a good thing! :-)

Also, I agree with your conclusion. Governing doesn't seem to me to be a destination. There's no one fixed point that's ideal, because even if you reached that ideal, what's ideal keeps changing. And political necessity/reality keeps preventing you from reaching that ideal to begin with.

I don't envy politicians much. Even if they try to do the good thing (rare, I know), there's a lot of pressure against changing the status quo. And even if by some chance they achieve the change for the better, many will not appreciate the work/sacrifice they've done to achieve it.

Posted by: JERiv | May 21, 2010 10:09 AM | Report abuse

America: where better-than-nothing is the most we can hope for.

Posted by: lostinthemiddle | May 21, 2010 10:12 AM | Report abuse

What I've learned is that my somewhat naive notions that the government can see a big problem, come together, and solve it (or at least completely address it) in a piece of legislation just can't happen, or at least not given our current politics. What it can do is move the ball a few yards down the field with compromises and ugly deals that I hate, and yet still support the final legislation. There's no "healthcare fix", but an attempt to address as many problems as possible in a bill that can be passed. And even with large majorities by a single party, you're never going to get the whole problem covered.

I know, at some level I always knew this to be true, but now I'm not going to blame individual legislators for most of the compromises they need to make. Our system just isn't set up well to pass laws.

Posted by: MosBen | May 21, 2010 10:14 AM | Report abuse

I think that this represents business as usual, and it's just now becoming evident to people how Congress works: the types of trade-offs that must be made, the political considerations, and the backroom processes are becoming more visible due to the posting of many of these things online, and the efforts of people like you, Mr. Klein, to use that quick access to information to show what is happening in real time. Up to now, we'd have to wait from a book by a Congressman a few years after retirement, and a decade after the process occurred. Thank you, Ezra!

Posted by: bandfriend | May 21, 2010 10:27 AM | Report abuse

Ezra,

Can you provide a link to the final House FinReg law and the final Senate FinReg law?

Posted by: baxterbaxter | May 21, 2010 10:30 AM | Report abuse

I heard Sen. Kyl this morning complaining about the current legislation and how it didn't address "Too Big to Fail".

Well, that [bleep] voted against Brown-Kaufmann. Undoubtedly he would weasel out of that one on the grounds that it "contained elements that he didn't agree with." It still stands that neither he, nor any Republican made a serious proposal to address "Too Big To Fail".

Of course, this is not the only area where this bill fails to address core issues related to the crisis (e.g. including hard leverage requirements, restrictions on risky speculation by commercial banks, loopholes in the derivatives legislation).

It's a shame that the votes of the entire GOP caucus have been purchased by the Financial Industry (with a couple borderline exceptions).

It's no less reassuring that so many Democratic votes have also clearly been purchased.

My own Senator Mark Warner emerges from this process smelling like [bleep] too.

Dodd failed to salvage whatever shreds of a public reputation he had in this process too. Undoubtedly he'll be turning tricks on K Street before too long.

Posted by: JPRS | May 21, 2010 10:33 AM | Report abuse

3 horrible bills and your crowing? This must be the dems new slogan "WE SUCK LESS"

Posted by: obrier2 | May 21, 2010 10:41 AM | Report abuse

Bring back Glass-Steagall!

Posted by: leoklein | May 21, 2010 10:45 AM | Report abuse

@obrier2: "3 horrible bills and your crowing? This must be the dems new slogan 'WE SUCK LESS' "

Actually, I think the slogan is "WE SUCK FASTER AND MORE OFTEN". Productivity of the 111th congress is apparently being measured now by quantity, rather than quality. So good for them.

Posted by: Kevin_Willis | May 21, 2010 11:04 AM | Report abuse

Congress spends a lot of time passing legislation. The real test comes about with the next step of the process. Implementation of the plan is the critical step. Government appears to ignore or be incapable of implementation of plans.
The SEC failed in almost every aspect of their responsibility to monitor investment fraud and trading schemes.
The EPA and Mineral Resource failed to implement laws requiring basic monitoring of industry drilling standards.
The Education department has failed in their responsibility to teach children how to read.
Congress failed to monitor government housing loans applications.
In short government has failed to implement almost every program they have created.
This has come at the cost of trillions of dollars.
Unionized Government workers and government bureaucrats are woefully incapable of performing the simplest of tasks.
We need to close down one government department at a time and bring in professional management. Failure to manage effectively should result in immediate replacement of the incompetent.
We now reward inactivity and spend most of our time listening to excuses. It should be obvious by now that many government institutions are designed to fail and most legislation results in utter practical failure. Spending massive amounts of money without being able to actually implement change is all to common. WE need to elect congressmen who now how to implement a business plan. Pontification is not implementation.

Posted by: cosciousness | May 21, 2010 11:18 AM | Report abuse

Legislation as Software Development - that is what comes to my mind. These are all early versions of these important products. As customer demands more (meaning voters, explicitly through mandate); we can see the next versions too....

Posted by: umesh409 | May 21, 2010 11:26 AM | Report abuse

The names given to legislation nowadays -- all of which sound like they were written by a second-rate advertising firm -- call everything into question.

Posted by: mnjam | May 21, 2010 11:33 AM | Report abuse

The main difference between software development and government legislation is that people can choose to pay for software, so there is feedback on whether it is actually worth the cost.
With government regulations, there is no feedback mechanism. We all are forced to pay through the nose for it, and our only choice then is to take advantage of it or not.
It doesn't matter if it is efficient, you've already paid for it. History will show that more legislation on a subject doesn't necessarily help (take the last 50 years of work on Public Education).

Posted by: natecar | May 21, 2010 11:33 AM | Report abuse

Whatever the dems want to do it must
be done before 11/2010.........

Posted by: UpAndOver | May 21, 2010 11:42 AM | Report abuse

MY GOD I agree with leoklein. What is this world coming to???


Can we please line up the economists who believe this FinReg (while better than the status quo) realizes its a piece of garbage with too much of this, not enough of that. My God sounds like healthcare all over again. Better than the status quo but it still stinks.


A little off topic but WTF is Geithner doing? Going to Europe? I'm wondering, if he was pressed on it if he'd bend to a single world currency, you know like the "Ameuro". I know fully well that our markets are tied together but we don't need to tie them together MORE so we get pulled down by them. SHEESH.

Posted by: visionbrkr | May 21, 2010 11:42 AM | Report abuse

AYFSM.... the only thing Congress accomplished was creating the larges budget deficit in history... but fear not this reecord will be eclipsed next year and the year after. Healthcare Reform my butt.... my mother in law has now had her MRI request refused twice because sh is 80 years old. That's some change there. Oh yeah.... thank you Congress for wasting the hundreds of billions of dollars on creating new jobs.

Posted by: nosuchluck | May 21, 2010 11:42 AM | Report abuse

I agree generally with this column. In particular, the accomplishments are fine by "real world" standards given the decision of the GOP to simply obstruct for partisan reasons. Most notably, it took a year for the admittedly flawed health care legislation to pass, but let's not forget in our frustration over its imperfections that it is light years ahead of what existed before, and will cover tens of millions of previously unprotected citizens. (It is going to be so interesting when it finally kicks in to listen to what these critics say when they realize that they are the very people who are benefitting the most.)

The other legislation from this Congress is also imperfect, but the comments about Ezra's column reflect both our frustration over this and a certain misunderstanding about our system. Madison and friends crafted the system to run on compromise in order to keep it from swinging too far to one extreme or another. In an age that moved more slowly, this was genius. Today events come at us faster, and even when they don't, the media report the events as if they are coming faster. We have grown impatient and want everything NOW.

The system is not geared for that, and that is a big problem; but it would be an enormously greater problem if the system were NOT designed this way. We would see pendulum swings that would make the last fifteen years look mild by comparison.

So our choice is to retain a system that does not get us all that we want, and sometimes takes too long to work in an age of rapid developments, or to embrace a system that may get somebody all that s/he wants quickly but takes us back and forth between the extremes. As Churchill said, democracy is a messy system but it's still the best system yet. I have been as frustrated as any of you, but thinking it over, I say let's realize how lucky we are.


Posted by: j24w | May 21, 2010 11:46 AM | Report abuse

Soon we can get back to creating Real Goods and putting Americans to work in Industries that Create Value and Long Term Jobs and not Wall Street smoke and mirrors.

Does this Legislations do this, and if not how can we make it stronger for the American People?

Does it Mandate “Public Exchanges” for Trading of Derivatives, Swaps, CDOs and other financial instruments and “Clearinghouses” for the confirmed transfer of funds.

http://tinyurl.com/2umj2k9

"By Victoria McGrane and Fawn Johnson, Of DOW JONES NEWSWIRES

-DERIVATIVES: Would require the vast majority of all derivatives trading be executed on a public exchange as opposed to between banks and their customers as many contracts are currently written. Most controversially, the bill would adopt language written by Sen. Blanche Lincoln (D., Ark.), that would compel any large commercial banks that have access to the Federal Reserve's discount window to spin off their derivatives trading business. The Fed, FDIC and Treasury as well as the banking industry have argued against Lincoln's measure."

Does it stop allowing Banks that receive Federal Discounted Interest Rates to place risky bets with customer money that is Protected by Federal Deposit Insurance?

Does it Separate Banks from Investment Funds and Speculators (i.e. Gamblers) and Remove these Derivative Trading Casinos from Tax Payer Protection!!!

Does it Prevent Wall Street's ability to manipulate the Price of Oil, Wheat and other commodities?

Does it stop Wall street actions that gouges Consumers and hurts legitimate businesses such as Airlines and Farming companies that need stable prices? When Gasoline reached $4~5/gallon at the Pump it was not to due supply and demand; it was Energy derivative speculation of Banks and Investment Funds.

Does it make Derivatives related to Commodities regulated by the “Commodity Futures Trading Commission”?

Does it END the Lack of Regulation and Transparency of Derivatives, Credit Default Swaps, CDOs, and Credit Rating Companies that caused Global Economic crises and the loss of Millions of Jobs, Homes, and Businesses?

Does it reenact "Glass-Steagall" to separate Commercial FDIC insured Banks from Investment Funds?

Does it Return the Power to the People?

Posted by: liveride | May 21, 2010 11:53 AM | Report abuse

So Senator 'give me small bills in a brown paper sack' Dodo and Representative Frankie light-in-the-loafers claim they're going to have this terd on the Oboob's desk in time to crow about it before election time, huh? Hilarious. These bills and their authors are excrement of a most foul and obnoxious nature. If this is what Oboobie considers worthy of crowing, God help him.

It's going to be hilarious to watch everyone that the Oboob stumps for go down in November.

Posted by: flintston | May 21, 2010 1:28 PM | Report abuse

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