In the rapturous days after Barack Obama's victory and the Democratic congressional sweep that accompanied it, House Financial Services Committee Chairman Barney Frank declared that the new Congress would enact a "new New Deal." Few people really thought at the time that he or his party meant this seriously. After all, the original New Deal--as anyone who has read history knows--failed to revive the economy.
Indeed, the modern era of rapid economic growth commenced after both Democratic and Republican presidents undertook to lift costly and stultifying New Deal regulations. The deregulation of trucking, railroad and airline rates produced lower prices for travelers and lower costs for consumers. The deregulation of interstate voice and data communication fostered the growth of the Internet and the cellphones that are ubiquitous today. The deregulation of oil and gas prices eliminated shortages and gas lines; and the deregulation of fixed commissions for securities trading led to markets where shares can be traded literally for pennies.
But Barney Frank was right. The signature initiatives of the Obama administration were very much in the mold of the old New Deal--the heedless spending, a stimulus plan focused on government employment, a health-care program that brought one-sixth of the economy under government control, and now the financial regulatory bill that would control another sixth. It will be years before the damage can be undone.
How did this happen? After Scott Brown's election to Ted Kennedy's Senate seat, Republicans had the votes to prevent the closing of debate and keep the Dodd bill off the Senate floor. They could have argued that legislation this important should not be rushed through Congress. They could have pointed out that there were no hearings on most of the major elements of the bill. And they could have reminded the Democrats that the commission Congress appointed to advise them on the causes of the financial crisis would not be reporting until mid-December.
They did none of these things. Instead they backed away from cloture, allowing the legislation to go to the Senate floor where the bill, bad enough to begin with, became steadily worse. Amendments to allow the Fed to regulate interchange fees on debit cards, and to force banks out of the derivatives business are only two examples. This was fully predictable, since the unpopularity of Wall Street and the banks would encourage amendments hostile to business and finance.
Why was the GOP unable to stand united and filibuster the bill before it reached the Senate floor? For the least meritorious of reasons, it seems: unwillingness to go to the voters this November without having done "something" to punish Wall Street and the banks.
This is true even though Senate Republicans know perfectly well that government housing policies were the principal cause of the financial crisis and the bill does nothing to address this issue, and that the losses of Fannie Mae and Freddie Mac--whose chief sponsor over many years was the same Barney Frank--will cost the taxpayers far more than TARP. Republicans also know that the last time they ran off without thinking they saddled American corporations with the huge, unwarranted costs of the Sarbanes-Oxley Act.
Ironically, as my colleague Karlyn Bowman noted this week in AEI's "The American" magazine, recent polls show that "skepticism of greater regulation of business in general is strong today, and the view that Washington could do great damage to our economic engine is widespread." Nevertheless, the Obama administration has been able to gain action on legislation that would do just this. Because of ObamaCare, the failed stimulus package, and the massive deficits that will afflict the country for years to come, the Democrats are likely to pay dearly in November. But not before those who are still in the thrall of the New Deal will have taken the U.S. financial system back almost 75 years.
Yesterday the Senate, including four Republicans, voted to shut off debate on the bill. This all but ensures that ill-conceived financial regulations will become law.
The only good thing to come from this spectacle is that it shows the business community and American voters that the Democratic Party--despite the moderate face of the Obama presidential campaign--has not outgrown their New Deal mentality. Democrats are still the party of government and the special interests that cling to it. The trouble is, the Republicans have not shown the American public that they have as clear an understanding of what they are for.
Peter J. Wallison is the Arthur F. Burns Fellow in Financial Policy Studies at AEI.