It's Going to Take a While to Bring Wall St. Under Heel

Hold the applause. The president would like us to celebrate his "Wall Street reform," but the legislation is misnamed. Barack Obama did not set out as president to reform Wall Street in fundamental ways but to restore it. Judging by the largest banks' booming stock prices and executive bonuses, he appears to have succeeded. The leading bankers expressed relief when they saw the reform package Congress cobbled together on June 25. Wall Street, loathed by citizens everywhere, dodged the bullet in Washington.

Congress followed Obama's path and rejected the sterner measures that promised to actually change things. As with healthcare reform, the White House, joined by the Treasury and the Federal Reserve, spent much of its energy opposing more aggressive ideas or bargaining small-bore compromises. The president kept a low profile, saving himself for the victory celebration.

Despite the defeat of real reform, progressives should not despair—the future looks much brighter than the headlines suggest. Yes, Congress choked on the hard questions. But assuming the Dems pull together last-minute wavering votes, it will be a stronger bill than either the White House or the bankers had intended, thanks to public anger, popular mobilization and nimble pressure from reformers.

This is not the end of reform; it's the beginning of a promising struggle to cut the financial sector down to tolerable dimensions and reduced power. The forces of reform demonstrated that they have the strength and especially the ideas to win this fight—just not this year.

Mainly, the legislation gives government regulators explicit authority to take tougher measures to curb Wall Street's dangerous behavior, but only if the Fed and Treasury decide it's a good idea. Don't hold your breath. These same agencies failed massively to confront the rampant recklessness that led to collapse (many of them claimed not to have seen the trouble coming).

Once again, the risk-taking is assigned to unwitting citizens and the economy. Washington saved big-dog bankers from failure, but it has not saved the rest of us from the bankers. Some reformers want to make the best of mixed results. The Consumer Federation of America says the banks "won a few battles; they lost the war." I would say it is the other way around: reform won some battles but lost the war.

Some valuable improvements, like the Consumer Financial Protection Agency, can lead to tougher rules, but even such worthy accomplishments were diluted in the fine print. The supposedly "independent" consumer agency is to be a "bureau" within the Federal Reserve, where hostile central bankers can find ways to smother the infant in its crib.

The improved controls on dangerous derivatives were likewise weakened in last-minute deal-making that gave bankers much of what they wanted—a free hand to keep the casino open for the gamblers. Bottom line: key elements of financial abuse that contributed to the breakdown have not been eliminated. And taxpayers are still on the hook for bailing out "too big to fail" banks.

Yet despite disappointing results, the losing issues revealed reasons for optimism. Think of this as Round One. We witnessed a surprisingly strong preview of Round Two in the aggressive reforms pushed by some Democratic senators. These proposals could someday—maybe sooner than we imagine—constitute the platform for authentic reordering of the banking system.

In the trenches the legislative battle was Democrats against Democrats (Republican senators were united in opposing everything). These roll calls made visible the deeply conflicted purposes of the party—the awkward straddle Democrats have maintained for three decades. Is it the party of working people or the party of big money? Democrats have for some time wanted to be both, but this year's action exposed the contradiction more starkly and put the two sides into repeated collision.