November 21, 2013
Senate Majority Leader Sen. Harry Reid, D-Nev. (AP Photo/Manuel Balce Ceneta)
Senate Majority Leader Sen. Harry Reid, D-Nev. (AP Photo/Manuel Balce Ceneta)

The big news right this second is that Democrats have actually taken steps to break the filibuster for executive branch nominees and all judicial ones save to the Supreme Court. This is great news for many reasons, but a big one has to do with financial regulation. With Democrats on the D.C. Circuit Court, the rules in the Dodd-Frank financial reform bill (both existing and ones yet to be finalized) will have a much greater chance of surviving frivolous court challenges.

The success of financial regulation is crucial to the success of the Democratic Party in the long term, particularly if the party is going to stake out a economically populist position. Filibuster reform may be a key ingredient in making that happen. At stake are the three empty seats on the D.C. Circuit Court. Today, either Republicans will cave and allow new judges to get a vote, or the filibuster reform will allow them to be seated with simple majority vote in the Senate.

While writing good financial laws and regulations is important, any regulations are seriously handicapped by the power imbalance between the regulators on one side, and stupendously profitable financial companies and their loyal judges on the other. Reforming the filibuster is just one step in improving background conditions for regulators, so they are not so outmatched.

Many commentators have raised the issue that it can be devilishly tricky to separate raw financial gambling from legitimate business practices. Matt Yglesias, riffing off this excellent piece by John Quiggin, made this case:

To take an example, airlines typically trade in the derivatives market to try to hedge their fuel costs. Airlines also sometimes want to borrow money to finance things like the purchase of new airplanes. A strict reading of the Quiggin Rule would either prohibit airline borrowing or else prohibit airline fuel hedging…while it’s easy to say “we should allow derivatives trading for the purpose of hedging but not for the purpose of speculating” (certainly that’s what I think), it’s a lot harder to write precise legislative and regulatory language that accomplishes that goal.

These are decent points. Trying to structure regulation of financial markets invariably involves some tricky judgment calls and clever use of language. Matt is right to say that reformers should think hard about such things. (Though this new report from the Roosevelt Institute does have a great deal of the specifics that Matt is asking for.)

But currently, financial regulations are not often tripped up on such quandaries. The biggest problem with financial regulation as it exists today is that financial regulators are completely overmatched by the power and money of the financial industry. Over and over, Big Finance has gotten rules struck down under grotesque misreadings of the relevant statutes. Here’s just one example: Last year, derivatives traders got a rule detailing position limits in derivatives markets struck down because their lawyers argued that the clause “the Commission shall establish limits on the amount of positions, as appropriate” means that position limits are optional.

This suggests two things. First, Democrats desperately need to fill the three empty slots on the DC Circuit Court, which rules on these cases and is currently stacked with right-wingers who are obviously eager to destroy any financial regulation, no matter how thin the legal pretext. Filibuster reform would solve this problem at a stroke. Second, simple financial reforms that only reduce the size and profitability of the financial sector would be worthwhile in and of themselves. Things like banning banking across state lines, or stating that no bank may hold more than 5% of total deposits, or breaking up any bank with assets greater than 5% of US GDP. Beefing up capital requirements would be good as well.

Another idea for the future would be to establish funding streams for regulators that are outside of the typical budget (like the CFPB is funded now) so that austerity-crazed Republicans can’t get at the agencies when they’re in the minority.

These suggestions aren’t fully fleshed out (this is only a blog post, after all), but the point is to try and level the playing field between regulators and the regulated. Once that is the case, much of the difficulty of getting good rules will vanish. Because it doesn’t matter how good regulations are, they’ll have little chance in an environment dominated by battalions of finance lawyers and hack conservative judges.

The fledgling economic justice movement in the Democratic party is showing good sense in paying attention to these power dynamics. Good rules aren’t enough, one has to make sure they aren’t torn to bits before they are implemented.