Who Will Represent the Interests of Taxpayers?

Reihan Salam is, like me, pessimistic about our economy:

If you thought the financial crisis marked a turning point in American history, and that Democrats and Republicans were committed to making TARP the bailout to end all bailouts, you'd be sadly mistaken. As Senator Chris Dodd's financial reform bill makes its way through the Senate, there is a broad conviction among experts that it will do little to prevent yet another financial crisis.

So the whole ordeal that has played out over the miserable months since the collapse of Lehman will hit us again within the next decade, only this time the banks will be bigger and more systemically important than ever. Indeed, as Neil Barofsky, the Treasury's TARP watchdog, has put it, "These banks that were too big to fail are now bigger. Government has sponsored and supported several mergers that made them larger. And that guarantee—that implicit guarantee of moral hazard, the idea that the government is not going to let these banks fail—which was implicit a year ago, it's now explicit."

Given the intense popular anger over the fecklessness of the financial industry, you'd think the stars would be aligned for a truly aggressive reform plan, one that established stronger margin and capital requirements. Instead, we have a bill that essentially says, "trust us, we'll sort this one out." That is, trust the infinite wisdom of Congress and the regulatory agencies to steer us through the rocky shoals of the inevitable next crisis. The hope is that the Dodd bill might make it slightly easier to sort out the mess by creating an Orderly Liquidation Authority that will allow the FDIC to take effective control of and dismantle a financial firm heading off a cliff. And if the authorities do their job well and anticipate danger and react to it swiftly and fairly, all will be well.

The trouble is that, as Eric Lichtblau's reporting in The New York Times reminds us, the revolving door between Congress and the financial industry is very much intact. There is no question that Wall Street's interests will be protected in closed-door meetings. If key government decision-makers are effectively on retainer with the big financial firms, who exactly is going to represent the interests of taxpayers?

It's not obvious that congressional Democrats or Republicans are up to the job.