Step-by-step financial reform

The Senate is poised to give final approval to a bill that would impose tough new regulations on banks and Wall Street. Passage of HR 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act, would mark the second major expansion of Washington’s regulatory power during the Obama administration — the first being the comprehensive healthcare reform law enacted in March. But these measures hardly mark a return to New-Deal-era interventionism in Washington. They’re not as radical as critics claim. That’s not to say they won’t have an impact on business and the economy, or that they’re faultless pieces of legislation. It’s just to note that despite the rhetoric about the Obama administration strangling the economy with regulation and maneuvering to take over the private sector, the reality is considerably milder.

The public’s perception of President Obama is shaped in part by his willingness to enforce rules already on the books — something his predecessor had little enthusiasm for. The change has been particularly apparent at the Department of Labor, which has beefed up enforcement of wage and workplace safety rules, and the Environmental Protection Agency, which is taking a much more aggressive approach to clean-air and auto-emission laws. Similarly, Obama promised to reinvigorate federal oversight of energy companies after the mining tragedy in West Virginia and the BP spill in the Gulf of Mexico — disasters that stemmed at least in part from lax regulation.

Those moves raised hackles among business lobbyists, but the administration wasn’t exactly breaking new ground — it was merely using the power lawmakers had already given the executive branch. By contrast, the healthcare reform Obama shepherded through Congress did expand federal power, by letting Washington take over rulemaking tasks that had previously been left to the states. Federal regulators will now tell insurers which treatments must be covered and how much of their premiums must be spent on medical care instead of overhead; the government will also bar companies from denying coverage to the sick or charging more based on preexisting conditions. Most dramatically, the law creates an entitlement to insurance for lower-income Americans and requires virtually every adult to buy coverage — an unprecedented assertion of federal authority over personal decisions.

Nevertheless, the new law doesn’t go nearly as far as many Democrats in Congress wanted it to. It leaves private health insurers in place, despite the demands of liberals that the government offer a Medicare-like alternative for everyone (or, more radically, to replace private insurers with a national health plan). Nor does it phase out employer-provided coverage in favor of fully portable, tax-subsidized individual plans, as a bold proposal from Sens. Ron Wyden (D-Ore.) and Robert F. Bennett (R-Utah) would have done. And to slow the rapid rise in healthcare costs, it tries mainly to improve efficiency, shift incentives and promote wellness in the government-run Medicare and Medicaid programs, rather than forcing price controls on the private healthcare industry.

In short, it’s no government takeover of healthcare. Rather, it’s a welcome attempt to bring about fundamental and desperately needed changes while still working within the current system.

Similarly, Obama responded to the tumultuous collapse of the credit markets by seeking new authority over the banking industry. He had widespread support on that front. The subprime mortgage meltdown and the subsequent credit crisis exposed fundamental problems in Washington’s hands-off approach to Wall Street, and lawmakers on both sides of the aisle were eager to protect taxpayers against another round of bailouts.

The Dodd-Frank bill would give Treasury Secretary Timothy F. Geithner much of what he called for when he outlined the administration’s proposed overhaul last year. Its major provisions include a new council of regulators charged with protecting the financial system against large-scale threats such as the one posed by the last housing bubble; new authority for regulators to take over and dismantle financial institutions that are failing; more safeguards and transparency for financial derivatives; strict limits on how much a bank with insured deposits can invest in hedge funds and private-equity firms; and a new, independent group of regulators to protect consumers against predatory or misleading financial products.

Just as revealing, though, is the list of things that liberal reformers sought but could not get into the bill, often because of opposition from the administration. The bill wouldn’t cap the size of financial institutions or order the breakup of the mega-banks that have already been treated as too big to fail. It wouldn’t ban the riskiest types of speculation or impose a legal requirement on Wall Street traders to act in the best interests of their clients. And it would leave intact the shadow banking system — an unregulated short-term lending market (where banks use securities as collateral to borrow huge amounts of cash for daily operations) whose failure in 2008 intensified the economy’s plunge.

In other words, the bill would impose no real structural changes on the industry, nor does it try to alter the way Wall Street conducts business. It wouldn’t roll back the deregulation that has remade and consolidated the financial industry over the last two decades. Instead, it would fill in some glaring gaps in oversight, while leaving regulators to work out the details of the new rules. Federal agencies would take a more active role in regulating prices and products in some markets, but more often the rules are aimed at providing more transparency and greater margins for error. Many of the most striking proposals for reform were either rejected or consigned to studies.

The Dodd-Frank bill, like the healthcare reform law, reflects the tendency of lawmakers and the administration to move incrementally, especially in the face of entrenched industry opposition. Rather than overextending the power of Washington, the legislation would fill holes in the regulatory fabric that simply cannot be left open. It’s an important and valuable piece of legislation, and we urge the Senate to pass it.

This administration is clearly more keen on asserting Washington’s regulatory power than its predecessor was. But as with the healthcare measure, the final version of the Dodd-Frank bill reveals how much the administration has pulled its punches — even when the target is as low in the public’s esteem as Wall Street is in aftermath of the downturn. That’s why liberals seem just as dismayed about what’s not in the bill as conservatives are about what is.