The debate of financial reform is looking eerily like the debate on health care reform.

In both cases both parties clearly see the need for change, and in both cases they disagree sharply on the means.

When the financial meltdown occurred neither party wanted to bail out Wall Street bankers and insurance companies with taxpayer dollars. But solutions to such emergencies often require distasteful actions.

But the point of financial reform is to prevent getting to the point where any party even needs to consider such a bailout.

Like the health care reform the attempt at financial reform seems to find all the fault in the private sector.  Congress, largely through Fannie Mae and Freddie Mac, were a central cause of this disaster and there is little or nothing  in this bill to address the role that lawmakers had in precipitating this crisis.

Obama has said he will veto the bill if it includes a $50 billion fund for failing institutions. On this he is siding with the House Republicans over the Democrats.  Such a fund protects the largest financial firms at the expense of the smaller firms. I hope he stays with that decision.

There is much to be improved.  New regulations should forbid off balance sheet accounting, derivative trading should be on exchanges where they can be supervised, capital requirements should reflect the risks of the investments.  There is a case to be made for restoring a safety wall between investment banking and commercial bank lending. There is even a good case to be made for busting up the largest players if that is necessary to bury the retarded concept of “too big to fail.”

But there is also an important need to keep Congress and their influence out of the financial sector.  Congress refused to acknowledge the crisis at Fannie Mae in spite of repeated warnings.  Fannie Mae plied Congress with campaign contributions and lobbyist pressures.

The more Congress regulates an industry the greater the role will be played by lobbyists. An administration that has repeatedly demonized lobbyists seems intent in creating an environment where lobbyists will grow in influence.

Man will always seek to improve his lot in life and he will always take risks to do so.  We will have bubbles, and it is a worthwhile tradeoff if it facilitates the economic growth that has created such prosperity for so many.

It is the job of the Fed ‘to remove the punch bowl when the party gets started’.  But it is the nature of Congress to avoid short term pain even if it leads to much greater long term pain. They have shown themselves able to be bought off and distracted from long term consequences.

While we need a wall between banking and investment , we need a wall between financial regulation and political influence even more.

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