On the right, the biggest objection to financial reform has been informed by politics, not policy: Wall Street donors, a key GOP constituency (and Democratic constituency, too), will, the argument goes, turn on Republicans if they start to offer real financial reform. But two rejoinders could be made. The first is that an increasing number of those in the financial community are waking up to the fact that real reforms are needed to make the financial system as a whole functional. Former Citigroup CEO Sandy Weill, for example, made headlines last year when he argued for a return to Glass-Steagall provisions. Better regulations and the opportunity to fail will encourage banks to invest prudently and will lessen the likelihood of a financial crisis, whereas the continued existence of Too Big to Fail and an unreformed Dodd-Frank could risk setting up the U.S. economy and the global financial system for another crisis. The current financial system subverts market interests and encourages asset bubbles. It’s a ticking time bomb, which brings us to the second rejoinder.
It’s in Wall Street’s best interest to ensure that another crisis does not occur (or at least is deferred as long as possible). If Too Big to Fail continues and another crisis hits, Washington is likely to single out another sacrificial lamb before bailing out the rest of the big banks — and who wants to be the next Lehman Brothers, left to twist in the wind while its rivals receive generous bailouts? Moreover, an increasing concentration of financial assets will increase the likelihood that the federal government will attempt to socialize the financial system further. Up to now, this socialization has taken the form of protecting certain politically connected big banks, but there is no guarantee that this socialization will not be pushed further, to the point that the government starts to control these banks, and their executives, more directly. If the Masters of the Universe want to keep raking in free-market money, it is in their own interest to ensure that finance remains a free (and thereby fallible) market.
Republicans can expect a political benefit if they take on financial reform. It changes the playing field. As the national economic debate currently stands, Republicans often find themselves arguing from a position of weakness or reaction. Republicans too often content themselves with arguing against what Democrats are proposing (on increasing the minimum wage, say, or extending health-care coverage to the poor and middle class). If the GOP remains simply the Party of No, it risks surrendering policy direction to the Democrats. A refusal to advance a more positive agenda hurts Republicans’ standing with the general public. While talk of a “debt crisis” may rally the party faithful, that fear seems remote to a large part of the broader public, all too many of whom find themselves treading water. And tax cuts, the Republican answer to Democratic promises of new spending, have also lost their luster for many Americans (in part because their federal tax burden has decreased substantially over the past 20 years).
Pivoting to financial reform could be a way for Republicans to rally around an affirmative policy measure. Financial reform that ends Too Big to Fail and encourages prudence in the financial system could unify the party base and reach out to those in the center. Rather than splintering the party or making it seem deaf to the needs of the middle — as debates over the budget and immigration, for example, have sometimes done — financial reform could point the Republican way forward for a set of policies that at once embodies market imperatives, improves the national economy, and speaks to the needs of the vast majority of Americans.
Republicans are presented here with a real opportunity, as financial reform is an issue where conservative interests overlap with those of the sensible Left. Senate Republicans could work to craft a financial-reform deal or series of deals with Democrats such as Sherrod Brown and Elizabeth Warren (yes, Elizabeth Warren). Republicans in the House can pass a financial-reform bill, negotiate a compromise with the Senate version, and send the reconciled bill to President Obama. If he vetoes it, that is a popular win for Republicans. If he signs it, Republicans can share in the credit for passing a much-needed and popular reform for the financial system. By taking an assertive position on financial reform now, Republicans can position themselves not as followers of Democratic demands but as equal partners in the task of governance. Just as welfare reform helped redeem the Democratic party in the eyes of many in the middle, financial reform could help wash away some of the stigmas currently troubling the Republican brand. Financial reform would also, like welfare reform, accomplish a fundamentally conservative end.
Only by opening the financial sector up to failure can we also open it up to enduring market success. The risk of failure encourages prudence. A financial sector that operated as a free and legal market would have a variety of interests and viewpoints, which would weaken the ability of a few mega-corporations to influence Congress and subvert the market. Without a functioning and sensible financial system, the U.S. economy faces dim prospects for a recovery. The current extended stagnation has numerous sources, but one wonders whether the dysfunctional financial system has a significant role here. The success of small government in the United States seems closely connected to a vibrant economy, and anything that restores the vitality of the economy could have positive implications for small-government aims.
The precise policies of a conservative approach to financial reform should remain part of an evolving discussion, and now is certainly not the time to close that off. For now, conservatives should agree to restore the long-term vitality of the financial system by moving it toward the principles of market pluralism and diffusion of interests, which would go far toward restoring both the Republican party and the U.S. economy.
— Fred Bauer is a writer from New England. He blogs at A Certain Enthusiasm, and his work has been featured in numerous publications.