Nay On Brown-Kaufmann – A Vote For Wall Street Or Sound Policy?

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I strongly disagree with Mike’s contention that Democrats who voted for Wall Street sold out by voting down the Brown–Kauffman amendment.  I understand the frustration with a political system that seems beholden to special interest groups, especially those from Wall Street.   However, I believe that voting down this amendment was a sound policy decision, not an act of fealty to the financial sector

We need financial reform, but we need reform that is substantive and on point, not amendments aimed at scoring political points.  Spinning off swap desks, auditing the Fed, capping the size of banks – these are good rallying cries for the populist crowd, but they don’t actually address the problems in our system.  Our focus should be on tougher capital regulations, creating a resolution authority for failing financial institutions and moving the ‘shadow’ banking sector activities of AIG, GE, GM, etc into the limelight in a regulated way.

Congrats to the 30 Democrats (and 31 republicans) that voted against the amendment.  The vote demonstrated that while tea partiers and their equivalents on the left want to politicize reform, there are still people interested in solving the real issues at hand.  It’s tempting to go after the banks, since they are the easiest part of this mess to understand and villify, but doing so causes us to lose sight of the more important issues at hand.

While I disagree with Mike’s contention that democrat’s voted for Wall Street – I think they voted for sound policy – Mike does bring up an important point that our democracy is too vulnerable to interest group politics.

Anyone who has taken an economics 101 class has sat through the lecture about interest group politics and how if something has a large effect on a small group of people and a small effect on a large group of people, the small group will be willed to act while the larger group will lay silent.  We see this all the time in politics; at all levels and in all areas.  Heathcare issues bring out heathcare companies, doctors associations etc.  Education reform brings out the teachers unions.  Calls for increasing car mileage brings out the auto unions and the Big three.

We need to reform that wholesale.   The DISCLOSE Act that has been introduced by Sen. Schumer is a start in the right direction, but what we really need is publically financed elections that match small donations to truly put the power in the hands of the people and reduce the power of big business, unions, and their lobbyists to control the agenda.

But back to the post – the important question is, should we break up all large companies?  In many cases, we should, but certainly not always.  Anti-trust laws in America have been around since the start of the 20th century and have led to a more competitive economy and the benefit of the American people.  The better question is, are the finance companies too big?  No, I don’t think so.  When you compare the finance companies to other industries, there is much more competition than the auto industry,  most areas of the tech industry, and the energy industry.

Breaking up the Banks does not necessarily lead to a reduction of the financial sector relative to our national economy.  I totally agree with the sentiment that Wall Street is too powerful, and that our economy needs to diversify – but how will splitting up the big banks do that?  Three somewhat smaller banks aren’t necesarily going to be smaller than one larger bank in GDP terms.

So lets get back to the financial reform bill:  Brown-Kaufmann  misses the larger picture that it was not the large banks that caused the problem, but the smaller unregulated banks who were operating out of the purvey of a good portion of the regulatory structure.  Bear Stearns, Lehman, AIG, and Countrywide were all well below any level that would have caused them to be broken up.   The problem is that the government didn’t have the authority to break up the smaller banks and so was faced with finding a buyer (Bear), letting them fail (Lehman) or granting them a loan to keep them afloat.  The one large bank that ran into trouble (Wachovia) was split up and sold off and was not the source of larger problems.

Mike discounts this argument that interconnectedness was a major cause… but the facts prove out – and so does common sense.  The problem at the heart of the financial crisis was that there were unregulated, badly evaluated toxic assets floating around Wall Street for many years, making people millions of dollars and generating a housing bubble that badly damaged many Americans.  Everyone owned them, and everyone had money in other people’s pockets – big or small.  So when one or two companies started going down, the whole town went with them.  This was more like a city on fire – the problem was not that a couple buildings were too big – the problem was that the fire could jump from one building to the next.  What we need is building codes and fire departments to make sure the fires don’t spread, not a demolition crew.

So should we be mad at Democrats for voting for Wall Street? No, we should be happy that they voted down a politically popular but misguided measure in favor of sound, productive reform.