The Definition of Insanity: Democrats Working to Undermine Financial Regulation

By Scrumshus (Own work) [Public domain], via Wikimedia Commons

[Updated below]

Erika Eichelberger has a great and depressing story on how some Democrats (and more Republicans), are trying to weaken the major financial regulation legislation Dodd-Frank, passed in response to the financial crisis, before it takes full effect.  This massive legislation requires a great deal of administrative rule making to implement it

A group of 21 House lawmakers—including eight Democrats—is pushing seven separate bills that would dramatically scale back financial reform. The proposed laws, which are scheduled to come before the House financial-services committee for consideration in mid-April, come straight on the heels of a major Senate investigation that revealed that JP Morgan Chase had lost $6 billion dollars by cooking its books and defying regulators—who themselves fell asleep on the job. Why the move to gut Wall Street reform so soon? Financial-reform advocates say Democrats might be supporting deregulation because of a well-intentioned misunderstanding of the laws, which lobbyists promise are consumer-friendly. But, reformers add, it could also have something to do with Wall Street money.

“The default position of many members of Congress is to do what Wall Street wants. They are a main source of funding,” says Bartlett Naylor, a financial-policy expert at the consumer advocacy group Public Citizen. “These are relatively complicated [bills]. It’s easy to come to the misunderstanding that they are benign.”

This challenges two narratives about the problems in Congress among the left leaning.  First, is the idea that Republicans are solely responsible for what’s wrong, and Democrats are well-meaning but sometimes forced to doing bad things by Republicans.  But that’s not the case here. This isn’t about deal making, it’s not about the filibuster.  The other narrative is that the problem with the Democrats is the so-called corporate Democrats, those who often represented marginal or red districts / states.

Reps. Gwen Moore (D-Wis.) and Marcia Fudge (D-Ohio), both of whom are members of the lefty House progressive caucus, [my emphasis] cosponsored the Inter-Affiliate Swap Clarification Act along with two Republicans. Moore and Fudge’s bill would allow certain derivatives that are traded among a corporation’s various affiliates to be exempt from almost all new Dodd-Frank regulations. The Commodity Futures Trading Commission (CFTC), a major Wall Street regulator, just issued its final rule on these products on Monday, and although the rule includes many exemptions, reform advocates say it is still stronger than what Fudge and Moore’s legislation proposes.

Fudge advocated for the bill “because it came at request of corporations and businesses in our district,” says Belinda Prinz, a spokeswoman for the congresswoman.

These are not your typical villains.

This is all bad policy and bad politics.  But it strikes me that this episode gives us a window into the larger problem.  To run a typical campaign, members need money. In certain moments, people are mobilized, watching them, and members will be more likely to do the right thing. But we tend to focus too much on formal decision-making, especially on legislation, and we miss that decisions are just a moment within a larger political process.  But the powerful make no such mistake. And they are the ones those member must rely on the fund their campaigns.  No doubt it’s easy to convince themselves that what they are doing does not undermine reform.

This process is the same even if activists hand-pick a candidate and put them in office. (See Kuster, Ann). Small donations can’t challenge this process.  The problem is the reliance on big money to run a standard campaign and the vast inequalities that ensure that a small number of people make the biggest difference.  We need to provide an alternative way of campaigning.  That would involve the creation of permanent, grassroots organizations, that could knock on doors, make calls, and provide the powerful person-to-person contact for which advertisements are a weak substitute. They would allow those people to monitor members, to make sure they were living up to the principles they campaigned on, so that it wasn’t just the lobbyists watching once the cameras are turned off. These organizations would make sure the members worked for them, not the other way around, that members “fear and loathe” them.  Interest groups and unions could also transform themselves from operating like arms of the Democratic Party into truly member driven organizations, that would hold members into account, and only work on behalf of those members who have earned it.

But watching the vultures of the Predator State circling the by no means sufficient, compromised Dodd Frank law, it’s clear something has to change.

[Update: For more on the battles in Congress as well as in the courts and the agency, check out Mike Konczol.]