Last Updated Apr 22, 2010 2:34 PM EDT
On the surface, the battle is already won. Sen. Charles Grassley, R-Iowa, yesterday became the first member of his party to endorse a bill clamping down on derivatives. Sen. Chris Dodd (D-Conn.) and his Republican counterparts on the banking committee also report progress in completing financial reform legislation. The bill got a further boost yesterday when the Congressional Budget Office projected that over the next decade the legislation would lower the federal deficit by $21 billion.
As a result, it's increasingly likely that Obama will have a bipartisan bill to sign into law, perhaps by Memorial Day, that will tighten regulation on financial firms; establish a Consumer Financial Protection Agency; and make it easier for government watchdogs to shutter troubled banks. That underlines what has been an open secret in Washington for months. In an election year, and with populist anger at bankers boiling over, Republicans can't very well publicly side with the financial industry in opposing key reform measures.
Which is why Obama seemed satisfied in his speech with merely encouraging what he called the "titans" of finance to join the party. "Some on Wall Street -- and let me be clear, not all -- forgot that behind every dollar traded or leveraged, there is family looking to buy a house, pay for an education, open a business or save for retirement."
Such tepid rhetoric won't exactly call to mind the "malefactors of great wealth" whom Teddy Roosevelt blamed more than a century ago for causing the "financial panic" of 1907. Indeed, Obama's genteel admonishment underlines a serious problem with the emerging reform package: It does little to end the era of "too big to fail" financial firms, a root cause of the crisis.
Obama appears to think that the "Volcker Rule," which among other things would limit the amount of liabilities that a banking company could hold, is sufficient to rein in the big banks' political and economic clout. In fact, such limits would do nothing to make institutions smaller.
Size, as I and other critics of the White House's banking policy have long said, is at the heart of the reform debate. It's really very simple.
If financial firms are too big, the U.S. government can't let them collapse -- as a truly free market would dictate -- without triggering economic calamity. With that ace in the hole, companies like Bank of America (BAC), Goldman Sachs (GS) and JPMorgan Chase (JPM) are free to act recklessly (or criminally) in order to juice profits.
Some lawmakers genuinely want to change that. A day before Obama's speech, Democratic Sens. Sherrod Brown of Ohio and Ted Kaufman of Delaware introduced a bill that would impose a hard cap on a financial firm's size. "We can either limit the size and leverage of 'too big to fail' financial institutions now, or we will suffer the economic consequences of their potential failure later," Kaufman said in a statement. Right. Unfortunately, the White House has previously dismissed the need for such limits. Although the Brown-Kaufman bill, called the SAFE Banking Act, in theory could be added to Dodd's broader measure, it's unlikely to survive the current horse-trading on Capitol Hill.
Obama closed his speech by citing a 1933 Time magazine article alluding to Wall Street's anger at the formation of the FDIC. It was a clear -- and premature -- attempt to link his presidency with that of another self-styled reformer, Franklin Delano Roosevelt, in the wake of the Great Depression.
The difference is that FDR socked Wall Street in the jaw. Obama, by contrast, seems content to slap it on the wrist. One reason why financial reform is moving ahead is because the banking industry is satisfied that Congress is producing a bill it can live with. Question is, can we?
Images from White House Web site and Wikimedia Commons