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.

The threat of the Slaughter Rule to pass the Health Care legislation leaves us wondering if the cure to our health care problems is not worse than the disease.  It seems that there are only two reasons to resort to this tactic.  Either Pelosi does not have enough votes to pass the bill or she wants to provide cover for those who do not want to face the consequence of their vote back home.

In either case she stands ready to thwart the will of the voters.  After so much outright bribery and arm twisting this does not speak well for the bill. If she really thinks that everyone will like the bill afterwards then she is speaking very poorly of her party’s ability to communicate anything.  More likely she is simply arrogant in believing that the great unwashed do not really know what is good for them.

The Blue Dog Democrats have the most to lose from deem and pass (which is really a by-pass).  If voters cannot see how their Congressman voted and this obfuscation is intentionally constructed by the Democrats in power, then their only option is to vote out every Democrat regardless of their fiscal conservatism.  That will be the only way assert the will of the voter.

In an effort to give cover to their Congressmen, the party leadership may bury them.

With a substantial majority in both houses the Democrats are having a difficult time passing the health care bill. Either the bill sucks or the party leaders; Pelosi and Reid are political incompetents.

While I agree that the bill is just disastrous in its content, the raw political arrogance and incompetence only makes it worse. The Slaughter rule that threatens to consider the bill affirmed without a vote will likely cause such outrage that many of those sitting on the fence will likely tilt against it, especially if the vote is dragged out beyond the Easter break.

If it is passed through without an up or down vote, the losers will be the Democrats who stood against it.  With no up or down vote, the voters can only assume that EVERY Democrat voted for it. In other words forcing this bill through with this method will hurt the Democrats much more in the coming election.

The critical miscalculation is assuming that this bill is all or nothing; it must be passed now or never.  Such thinking is extremely limiting. Power comes from expanding options, not limiting them.  There are plenty of options for improving health coverage and controlling costs that are not covered in this bill.

The Democratic leadership is inflicting itself with defeat for years to come.  This is an incredible feat considering the leads they had only a year ago.  A good bill does not need bribes and favoritism to pass, and it certainly does not need to consider radical procedural modifications to game the vote. The only bipartisan part of this bill seems to be the opposition.

With the clarity of time we can look back at the brink of the collapse that hit us just prior to the last national election.  In the midst of the collapse we were stunned and angry, and tended to blame the party in power. Although the Democrats had controlled both houses of Congress since 2006, the disaster took its bigger toll on the Republicans.

While the roots of this collapse extend back through many administrations of both parties, it is important to know what did not cause this as well.

Some blamed the deficits, others blamed deregulation, but many just saw the main cause as unbridled greed.  I contend that while there were deficits, and there was greed, none of these played a critical role in fomenting this crisis.

As Thomas Sowell noted, blaming this crisis on greed is like blaming an airplane crash on gravity.  It is true but it doesn’t really explain anything. Worse if we just blame the undeniable then there is no need to examine human error, design flaws, or study ways to keep it from happening again.

Greed has been with us since the dawn of man. Why did it decide to show its ugly face in September of 2008? Greed is encumbered by the limits of a rational society and in a capitalist system it is encumbered by competition.  I may want to charge $2,000 a ton for steel, but competition keeps me from charging what I want, and even forces me to keep my payroll and expenses in line.

Our government tries to contain the fear of greed with regulations. If we are to blame greed we must face the failure of our regulations, or we may even need to face the possibility that our regulations fostered greedy behavior.  The second most common blame was the laissez faire attitude that had fostered deregulation of the financial markets.   Usually this is directed at the repeal of the Glass Steagal Act which separated lenders from investment banks. This law was repealed under The Gramm-Leach-Bliley Act, also known as the Financial Services Modernization Act of 1999, which was signed by President Clinton.

But other nations, notably Canada, also repealed similar legislation and they did not experience the financial crisis we did. But Canada also did not suspend prudent lending standards to force the spread of home ownership beyond its natural market.

Nor was deregulation the norm under George W Bush. In fact just the opposite was true.

Elliot Spitzer noted that we did not suffer from the lack of regulators or regulations. There were plenty to do the job, but they seem to lack the courage and the will to do the job.  We needed better regulations, not more of them.  In many cases the regulated industries such as Fannie Mae  (exempt from SEC and FDIC regulation) spent enormously on lobbyists and campaign contributions to thwart efforts to regulate them.  It was successful for them.

The biggest recipient of campaign contributions from AIG was Barak Obama. The biggest recipient of the PAC assembled by the largest mortgage lender for Fannie Mae, Country Wide Finance,  was Barak Obama. The largest recipient of campaign funds from Fannie Mae was ….. yes, Barak Obama. The second largest recipient in these three cases was Chris Dodd, Chairman of the Senate Banking Committee.

The deficits which seemed so irresponsible at the time now look like pocket change.  Deficits do matter but it depends how long they last, how large they are relative to GDP, prevailing interest rates, and what the deficits are spent on.  Personal debt spent on a house or investment equipment may seem prudent, the same debt spent on a boat or jewelry would not.

While the debt incurred under George Bush was arguably bad, it was not a critical factor in causing the meltdown.  We incurred controversial debts under Ronal Reagan and incurred little repercussion from the financial industry.

Bubbles are nothing new and may just be a part of the pricing mechanism. The Federal Reserve was created to bring stability to our financial system. It first test was the Great Depression of 1929, and it failed miserably.  Nearly 80 years later with the value of the dollar down 95% and in the middle of the worst financial crisis in our adult lives, we should ask if it is part of the problem.

Eliminating commonly perceived causes should help us focus on solutions that will work. If we delude ourselves into blaming greed, deficits, and individual demonas we risk designing solutions that not only will not work, but will like make the problem worse

Here is an idea for our times.

We create a Federal Agency called the Consumer Investment Information Corporation.

It is funded by a fee on all banks and institutions needing an independent investment rating.

It is governed by nine people; three selected from each political party representative group in the Congress, and another three selected from the first six. The last three can be academics or professional analysts.

The CIIP can hire investment services like S&P and Moody’s to rate the financial institutions. The rating service would no longer be hired and paid by the institutions they rate; they would be serving the consumer.

Over a period of say 5 years, the FDIC protection would be removed from banking institutions. During that time a CIIP rating would be given on those institutions on their relative stability and strength.  Banks could then compete on the basis of stability and financial strength. Higher rated banks could sell CD’s with lower yields since they provide value through their strength. Lower rated banks would have to pay a higher interest rate to compensate for their higher risk.

Current FDIC protection has replaced market information. Consumers do not care about the strength of their banks because they have federal insurance protection. It has encouraged reckless banking behavior. Every time the FDIC limit is raised the banking sector acts more irresponsibly.

It is time to let the market function by providing information, rather than rendering the information irrelevant by guaranteeing incompetence.