Dodd's Phony 'Consensus' Dooms Financial Reform

(MoneyWatch)  The stormy national debates over health care and financial reform have followed a similar script: Partisan firefights, industry scare-mongering, flaccid political leadership, compromise. Yet the process has produced two starkly different outcomes. For while the proposed fixes to our health care system, despite flaws, promise to make things better for many Americans, the proposed fixes to our financial system promise to make things worse.

On March 15, Sen. Chris Dodd of Connecticut, the Democrats' point man on financial reform, is expected to release his revised legislative solution for many of the problems that led to the housing bubble and that effectively crippled the U.S. economy. Unfortunately, in its current form the measure appears to be virtually solution-free.

The bill does nothing to end the era of "too big to fail." It preserves the disastrous union between government-insured commercial banks and investment banks. It entombs an agency to shield consumers from dangerous practices within an agency complicit in allowing those practices to thrive. It also subverts frequently stronger state consumer protection laws by enabling federal bank regulators to "preempt" them. It exempts nonbank firms, such as notorious "pay-day" lenders, from stricter federal regulation.

"It has always been my goal to produce a consensus package," Dodd said today in a statement.

Consensus by whom? Not most Americans. While there is division over the merits of the government's health care plan, there's near unanimity on the need for fundamental change to the financial system. Dodd's "consensus" is really a code-word for political viability. Lawmakers use the terms synonymously, but obviously they mean different things.

Take the proposed Consumer Financial Protection Agency. There's enormous public support for an independent government watchdog focused wholly on guarding people against predatory lending. Such support also exists across the political spectrum. Most business economists, a group not usually known for their bleeding hearts, believe that such an agency would do nothing to impair financial regulation or reduce access to credit, two of the major arguments trotted out by opponents. Small businesses, too, strongly back creation of the agency. If there's anything rabid Tea-Partyers and wild-eyed progressives can agree on, it's that Wall Street is dangerously out of control.

On Capitol Hill, however, there's no such consensus. Only political calculation, as lawmakers weigh the financial industry's hefty campaign contributions -- it's worth noting that Dodd is from Connecticut, home to many Wall Streeters, insurance companies and hedge funds -- against the costs of ignoring the public interest. So they take the politically viable route, which in this case means burying the CFPA within the Federal Reserve.

It also means pinning financial reform almost entirely on a push to strengthen regulation. That's certainly necessary. But keeping a closer watch over banks is insufficient without some structural changes to the industry. What real power would the "systemic risk council," the government's proposed regulatory roundtable, have to dissolve, say, Bank of America (BAC) or JPMorgan Chase (JPM) if those companies run into trouble when their very size and primacy within the financial system make them impossible to break up?

"Resolution authority," as this power is called, looks swell on paper. And in the middle of another financial meltdown involving even bigger institutions, that's where it's likely to remain.

If this is reform, we're better off standing still.