Washington’s passage of financial regulation last week served as a perfect reminder of so much that is wrong with DC.

Despite moderate legislation (I would say “watered down”), financial regulation only passed along essentially party lines. With elections having become endless year-round campaigns, we are left with a process where all legislation is examined only for political gain/loss and not policy implications. All of us, democrats and republicans alike, lose as a result.

Here in the 2nd District we have a front row seat to this disappointment. When Wall Street needed help, Congresswoman Schmidt was there to vote in favor of their bailout. However when the time came to vote to pass some basic, common-sense measures to ensure that taxpayers were not once again holding the bag for Wall Street’s excessive risktaking, Congresswoman Schmidt voted no. She has chosen to side with the interests of Wall Street bankers over those of her constituents.

All of this goes back to a climate in Washington that values winning elections and the preservation of power above all else. Preying on this, special interest groups are all too eager to step into the void with large checks to help their handpicked candidates win elections. So it is no surprise that groups like Wall Street get to write their own legislation and get hundreds of billion dollars in help when they need it. They have purchased the best representatives that money can buy.

Back to the financial regulation legislation– I don’t believe the present version of the bills go far enough. Sen. Sherrod Brown has proposed an amendment, Brown-Kaufman, which would be an excellent step to cap the size and leverage of the biggest banks. If we wish to ensure we don’t have a repeat of 2008′s disastrous events we must make “too big to fail, too big to exist.” So far this amendment has faced massive opposition from the army of lobbyists in Washington and their allies in Congress.

This is a great article on what’s going on behind the scenes of financial regulation. Great read.

It looks like the only thing Congress might be able to get done any time soon will be some kind of financial reform. In an election year, it will be really interesting to see who has the gall to side with big banks (despite being the biggest contributor in Washington) over reigning reckless risk-taking. The WSJ’s headline of Banks Gear up for a Battle, unfortunately, says it all. The good news? I’m more hopeful we’ll get some real protections in place than I have been for months. I guess we just have to stay tuned…

Funny.

Reality.

I still hold out hope.

Potentially great news being reported today that the Obama administration will present comprehensive proposals for financial reform that are close to what Paul Volcker has been asking for.

At the core of this issue is the need to make sure that “too big to fail” means “too big to exist”. As long as these financial institutions believe that the next time they blow themselves up, that we, the taxpayers, will be there to bail them out because they are “too important”, we’ll continue to have these crises.

We need smaller institutions whose individual failures could be digested by the financial system. Related to this we need to separate the side of the business that essentially takes massive risky trading bets from the part that does traditional banking. In the Fall of 2008 there was serious concern that money wasn’t going to come out of the ATM’s the next day. This is a great first step to ensure that we don’t find ourselves in that terrible position again.

Simon Johnson is one of my favorite economists. I trust his views on the financial markets and on financial regulation. It is my (disappointed) belief, that we should be greatly concerned about heading towards another financial crisis unless we act swiftly to return responsibility to our financial system. Barring this, look for more massive harm to the real American economy. I’m still kind of flabbergasted that Wall Street could basically cause a mess that nearly brings down the American economy, and yet be the only ones who are thriving right now.

“We now have a financial system that is completely based on moral hazard. Crazy things happen when you have a financial system like that.” – Simon Johnson (from below video)