Here's a Republican Idea for Financial Reform

US DEPARTMENT OF THE TREASURY seal, on texture with Bank of America, American International Group, Citigroup, General Motors, GMAC, Chrysler and Chrysler Financial logos
Duncan Currie is the deputy managing editor of National Review.

Democrats view financial reform as a winning issue, and with good reason. Though Americans remain divided over whom or what to blame for the post-2007 credit crisis, anti-Wall Street sentiment transcends partisan lines.

While liberals have been demanding stronger consumer protections, many conservative tea-partiers have been railing against the Troubled Asset Relief Program (TARP) - which, lest we forget, was signed by President Bush. Indeed, the populist anger comes in different flavors; and in the wake of revelations about alleged fraud at Goldman Sachs, that anger may intensify.

Does this mean the public will rally behind the 1,336-page financial overhaul devised by Senate Banking Committee chief Chris Dodd (D., Conn.)? Not necessarily. Republicans can make a good case against the Dodd bill. The key is to explain that their skepticism is rooted, not in a desire to insulate Wall Street from tighter regulations, but rather in a desire to preserve financial soundness and shield taxpayers from future corporate bailouts. They can credibly argue that Dodd's legislation would perpetuate the "too big to fail" (TBTF) dilemma and lead to more government-funded rescue packages.

With all 41 GOP senators opposed to the current version of that legislation, the White House has been urging Democrats to scrap the proposed $50 billion resolution fund, which would be supported by the largest financial companies and used to wind down failing institutions. Yet, as NR has editorialized, removing the liquidation fund would not close the loopholes that threaten to transform Dodd's resolution authority into a bailout machine. Moreover, by establishing a Financial Stability Oversight Council to monitor and tackle "systemic risk," the bill would allow federal authorities to classify a non-bank financial firm as "systemically significant" (i.e., TBTF) and have it regulated by the Federal Reserve. "Under the Dodd plan," Clive Crook writes in National Journal, "many big financial firms would indeed be declared too big to fail."

The bill suffers from other flaws. Writing in the Wall Street Journal, American Enterprise Institute (AEI) scholar Peter Wallison and University of Pennsylvania law professor David Skeel point out that the Federal Deposit Insurance Corporation is simply not equipped to manage the closure of enormous non-bank financial entities. As for launching a new consumer watchdog inside the Fed, AEI scholar Alex Pollock believes this would be "a bureaucratic nightmare."

A Fed-housed consumer unit wouldn't really be part of the central bank, says Pollock; it would effectively be a stand-alone agency (which is what President Obama has wanted all along) funded by Fed profits. The Consumer Financial Protection Bureau outlined in the Dodd bill would have an independent director, an independent budget, independent rule-writing ability, and enforcement authority, though its rulings would be subject to appeal by other regulators. The fear is that such a bureaucracy would reduce consumer credit options and hamper economic growth. There are also legitimate concerns that Dodd's corporate-governance provisions would boost the clout of labor unions and other politically active interest groups while doing very little to help smaller shareholders.