For too many in Washington, a phantom recession

Congress abides erosion in post-recession Wall Street reforms

It seems as if the Great Recession never happened — that it was an apparition, like Marley's ghost. It clearly had no direct or dire effects on President Obama, members of Congress or the regulators at the Federal Reserve who were supposed to be watching Wall Street. Two developments of the last 10 days suggest that no one responsible for the oversight of the banks that caused the financial crisis of 2007-2008 suffered a layoff or furlough or foreclosure. I can't imagine that any of them had to apply for unemployment benefits or food stamps.

Last weekend, Congress passed, with Obama's approval, a massive government spending bill that included a give-back to Wall Street — the dropping of a reform meant to keep the big banks from taking certain investment risks with money backed by taxpayers. The rule was part of the Dodd-Frank reforms of 2010, enacted in the wake of the financial meltdown that caused the recession.

Let's call it the "Lincoln rule" because former Sen. Blanche Lincoln, a Democrat from Arkansas, came up with it originally.

Americans who suffered burns of any degree in the recession would appreciate the common sense in the Lincoln rule: To make sure a bank's biggest market gambles are taken without the backing of the Federal Deposit Insurance Corporation. It's there so the FDIC — that is, taxpayers — won't have to bail the banks out again. It's there to make the banks risk-averse, so they will stay away from the kind of clever, greed-inspired "dark market" speculations that led to the financial collapse.

Why would we want to roll back this rule? Why would something this important be in a spending bill?

Because the executives and lobbyists of the Wall Street banks drew it up and got Republicans to attach it to the spending bill. And because President Obama and Democratic leaders, with only a few notable exceptions — Rep. Nancy Pelosi, Rep. Maxine Waters, Sen. Elizabeth Warren — did not fight to remove it.

So Congress killed an important Dodd-Frank reform, allowing the big banks to return to some of the same practices that caused the recession, with taxpayers on the hook again for losing bets.

Sen. Ben Cardin of Maryland said: "The eroding of important Dodd-Frank provisions that certainly will open the door to a redux of too-big-too-fail-style risks is particularly troublesome."

But he voted for the spending bill anyway, citing the threat of another government shutdown if the measure did not pass.

Maryland's other Democratic senator, Barbara Mikulski, called the bill's passage a "monumental achievement" because, in her mind, it represented the kind of compromise that has been woefully lacking in a bitterly partisan, do-little Congress that got only a 15 percent approval rating in the last Gallup poll.

On the phone the other day, Mikulski noted a long list of onerous riders that Republicans tried to attach to the bill, several of which dealt with financial regulation. "We beat back every one but this single one," Mikulski said, referring to the attack on the Lincoln rule.

But "this single one" was an important one.

"It should not have been treated as part of a [spending] negotiation. It was a mistake to give in to that tactic," Barney Frank, the former congressman and co-author of the Wall Street reforms, said in a phone interview. "I'm disappointed the president didn't say this was off limits."

The Dodd-Frank rollback sent Wall Street bankers home for the holidays all smiles. These guys have no shame, of course. Even in the long wake of the financial calamity they caused, they complained that the Lincoln rule was too hard and costly to implement. What they really didn't like was that it required banks to risk more of their own money.

But the whiners got their way. Republicans and Democrats alike accommodated them.

Not to worry, say some politicians, analysts and editorialists, the loss of the Lincoln rule is no big deal. There's always the Volcker Rule. Certainly the Volcker Rule will take care of this problem of risk.

The Volcker Rule, named after former Federal Reserve chairman Paul Volcker, is also part of Dodd-Frank, and it's a major part, endorsed by five former Treasury secretaries. Similar in ways to the Lincoln rule, it called for a fundamental separation of a bank's speculative trading from the federally insured deposits of its customers. It is intended to force the FDIC-backed units of banks to get out of hedge funds and private-equity funds, and to do so by a certain date — July 2015.

So that's good, right?

Except that on Thursday, the Federal Reserve agreed with the big banks that they needed more than five years to sell off these investments. They have until at least 2017 — a full decade after the financial crisis — to do that now.

And, by then, who knows? Given the Republican control of both the House and Senate, and with the possibility of either a Wall Street-beholden Democrat or a Wall Street-beholden Republican in the White House, all such reforms might disappear, like Marley's ghost, as if the Great Recession had never happened.

dan.rodricks@baltsun.com

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