Eric Cantor, Unintentionally Hopeful

By their enemies, you shall know them (or, in this case, it).

A vote against the Dodd-Frank Wall Street Reform and Consumer Protection Act was not unreasonable for individuals who have been awake the past couple of years and recognize that huge financial institutions must be regulated.

Mark Thoma at CBS Moneywatch observes

This bill is not going to end the problem of too big to fail. If the banking system is threatened, then one way or the other it will be bailed out. The consequences to the economy would be too large to do otherwise. Thus, banks that are big enough to pose a systemic risk enjoy an advantage over other banks. Banks that pose a systemic risk will be assumed to be safer than other banks due to the implicit government guarantee. This gives large banks an advantage over smaller banks that do not, on their own, threaten the financial system if they fail.

In addition, the implicit guarantee gives large banks the incentive to take on too much risk, and this is a reason to regulate the amount of risk they can take (and I don’t think the proposed legislation does enough in this regard).

More comprehensively, Senator Russ Feingold of Wisconsin, who has been "a lonely voice for sanity in the financial markets," explained

At the start of this process I made clear that I had a simple test for financial reform -- will it stop another financial meltdown? This bill fails that test, and I won't support legislation that fails to protect the people of Wisconsin from the pain of another economic disaster. And I don't need to be lectured about this issue by people who supported the repeal of Glass-Steagall, which paved the way for this terrible recession.

I had hoped I would be able to support the legislation, given the clear need for strong reform. I cosponsored a number of critical amendments during Senate consideration of the bill including a Cantwell-McCain amendment to restore Glass-Steagall safeguards, Senator Dorgan's amendment that addressed the problem of "too big to fail" financial institutions, and another "too big to fail" reform offered by Senators Brown and Kaufman that proposed strict limits on the size of those institutions. Each of those amendments would have improved the bill significantly, and each of them either failed or was blocked from even getting a vote.

After that, it wasn't a close call for me. It would be a huge mistake to pass a bill that purports to re-regulate the financial industry but is simply too weak to protect people from the recklessness of Wall Street. That would be like building an impressive-looking dam without telling everyone that it has a few leaks in it. False security is no security at all.

This bill is not going to end the problem of too big to fail. If the banking system is threatened, then one way or the other it will be bailed out. The consequences to the economy would be too large to do otherwise. Thus, banks that are big enough to pose a systemic risk enjoy an advantage over other banks. Banks that pose a systemic risk will be assumed to be safer than other banks due to the implicit government guarantee. This gives large banks an advantage over smaller banks that do not, on their own, threaten the financial system if they fail.

In addition, the implicit guarantee gives large banks the incentive to take on too much risk, and this is a reason to regulate the amount of risk they can take (and I don’t think the proposed legislation does enough in this regard).

(Open Left's Chris Bowers here summarizes both the weaknesses and strengths of the final bill and its deficiencies are detailed here by professor Michael Hudson)

The strongest argument in favor of the legislation, however ironically, comes from a fervent opponent, House Minority Whip Eric Cantor of Virginia. He contends

This legislation is a clear attack on capital formation in America. It purports to prevent the next financial crisis, but it does so by vastly expanding the power of the same regulators who failed to prevent the last one.

This reasoning one hears from professional Republicans, officeholders, pundits, and talk show hosts, though generally not, to their credit, from the conservative rank-and-file. The proposed legislation would strengthen the hand of regulators who enabled the current crisis when they were too weak to regulate industry. Therefore, it must be stopped.

Stop us before we serve the American public! Regulation failed because conservative ideology demanded that it do so, that it be passive in the face of opposition from business. This bill, if Cantor is to be believed, expands their power and thus is destructive.

Thank you, Representative Cantor. You have confirmed that some opponents fear that the financial services industry may no longer have their way with the American people. We can only hope your fear is realized.

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