Banks win the day in Congress; Obama calls it ‘reform’ 

With Greece burning and the Dow crashing, not everyone paid attention to the Senate’s debate on financial regulation — which is good for President Obama in his effort to mislead the country into seeing this whole battle as one of Democratic reformers vs. Wall Street lobbyists and their Republican cronies.

The President has been saying for months that he would veto any bill that wasn’t real reform. I’ve been saying all along that no financial bill will pass that doesn’t have the Goldman Sachs seal of approval. Yesterday, the President proved that he has a pretty weak definition of “reform,” and he gave further evidence that I was right.

Here were the battle grounds that the White House won’t want you thinking about:

Gutting the Fed audit

A rare issue with genuine legitimate, broad bipartisan support, this was a measure sponsored by socialist Sen. Bernie Sanders, I-Vt., and backed by conservative Sen. Jim DeMint, R-S.C. Rep. Ron Paul, R-Tex., congress’s most libertarian member, was the godfather of this effort.

The idea, roughly, was to subject the Federal Reserve Bank to the sort of transparency requirements under which government agencies operate. (But isn’t the Fed a government agency? you ask. Well, it’s complicated.) There are lots of reasons to do this: the Fed largely acts as a corporate-welfare agency, lending money to banks; also, the Fed is a bank, buying and selling securities and other financial instruments. Whom is the Fed subsidizing? How is it affecting the market?

The big banks — the clients of the Fed — obviously don’t like this. The Fed doesn’t like it, either — it enjoys operating in the shadows.

So you had a bi-partisan coalition of folks wanting more open government and more transparency in finance, and on the other side were the bank lobbyists. Obama came down with the bank lobbyists, gutting the Fed audit measure so that the vast majority of the Fed’s wheeling and dealing is still secret.

Breaking up the Big Banks

Here’s another one with some Left-Right convergence. I agree with Arnold Kling, affiliated with Cato, writing in National Review, that the single most reliable and least intrusive way to prevent both future bailouts and future systemic threats is to simply cap the size of banks. This avoids the messy, foolish reliance on regulators, which threatens to bring either inaction through capture, or gangster government. It also limits the power of the big banks.

Majority Leader Harry Reid gave a nod towards this measure, and so some liberals got excited it might pass. But honestly, think about this for a second. Is there any way this Democratic majority, with this majority leader, under this President, would break up the big banks? Reid gave a throwaway comment to a liberal reporter, and then a throwaway free vote on an amendment he certainly didn’t whip for.

Obama didn’t personally oppose it, but his deputies did.

Embarassingly, but unsurprisingly, almost every Republican voted no. The Republican aye votes were Tom Coburn, John Ensign, and — most interestingly — Richard Shelby, the top Republican on the Banking Committee,

Goldman will win, and Reid will see the spoils

As a parting note to this cheery Friday morning post, let me state it plainly: Any financial regulation that passes will have the effect mostly of crowding out smaller financial institutions and blocking new entrants. Obama will call the bill reform, and he will declare that it is now safe to go back into the markets. It will also institutionalize bailouts. And you’ll see the big banks working to re-elect Harry Reid this fall, and Barack Obama after that.

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Timothy P. Carney

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