Obama Is Tinkering with Changes to the Banking System While Big Finance Collapses

A congressional oversight panel appointed to monitor the Wall Street bailout (TARP) outlined a few of the problems so far in its second report (released yesterday) including:

• The shifting rationale for a program that amounts to dumping hundreds of billions of dollars on the companies that got us into the mess, along with a continuously changing approach and no guarantee that it will actually stabilize financial markets or help those most impacted, including "homeowners threatened by foreclosure, people losing their jobs and families unable to pay their credit cards," let alone protect the interests of taxpayers or bring confidence back for shareholders.

• Although Treasury responded to a first round of questions from the panel, "it did not provide complete answers to several of the questions and failed to address a number of the questions at all." For example, the panel "still does not know what the banks are doing with taxpayer money." In other words, the Treasury's handling of the bailout is starting to make Paul Bremer's mismanagement of Iraq's reconstruction project (remember the bricks of $100 bills being thrown around without any accountability?) look like a small corner store stickup. Perhaps the panel could recommend that Congress hire Stuart Bowen to set up shop over at the Treasury. At the same time, Congress could start asking why Treasury's strategy "appears to involve allocating the majority of the $700 billion to 'healthy banks,' banks that have been assessed by their regulators as viable without federal assistance."

So, we have to ask why President-elect Barack Obama is asking for more money to be disbursed when the first $350 billion has been allocated without accountability, and the Treasury department reportedly isn't in a rush to receive it.

We seem to be headed for a triple-failure response to the crisis:

First: A poorly managed bailout (TARP).

Second: A stimulus package that most economists agree will not be enough to revive the economy and, with a good portion going out in the form of corporate tax breaks instead of shovel-ready projects, may not even be enough to stop the hemorrhaging of jobs.

Third, and perhaps most important: The absence of any serious debate over financial regulatory reform.

Congress is too tied up with the stimulus package to take on this latter responsibility with anything like the seriousness it deserves.

Maybe that will change with the incoming administration. After all, it was Obama who said in his March 27 speech at Cooper Union that, "To renew our economy and to ensure that we are not doomed to repeat a cycle of bubble-and-bust again and again and again, we need to address not only the immediate crisis in the housing market, we also need to create a 21st century regulatory framework."

Let's hope so, but so far there is no evidence for it. All of Obama's speeches have focused on the stimulus package and fiscal (rather than regulatory) policy, with little more than a nod to the idea that some kind of reform needs to occur in the mortgage markets. Not much more than that. The danger is that they will move quickly to pass something simple, especially with a G20 summit coming up in April that puts additional pressure on the new administration to demonstrate new leadership. And so, the drum is beginning to beat in Washington for Congress to quickly reform the current patchwork of regulations by giving the Fed expanded authority over banking regulations, a move that could be disastrous.

I could be wrong about this, but if I'm not, let's hope Obama is smart enough to resist any such proposal.

For one, if we want strong regulators, we need to house them in public institutions. Just as Treasury Secretary Henry Paulson has suggested that Fannie Mae and Freddie Mac will fail if they have to serve two masters -- shareholders and the public, whose interests often conflict -- so many of the other institutions responsible for getting the economy back on track must be redesigned to more capably represent the public interest.