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Why the Dodd Financial Services Bill Is Bad... For Democrats

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The New York Times' headline said it all: "Off Wall St., Worries About Financial Bill". The Democrats in Washington may think it's a slam dunk, but the rest of America doesn't agree.

Look, those who are on the side of significant financial reform are fighting on the side of the angels -- and with broad public support. We are fed up with Wall Street abuses and arrogance that makes life for the rest of us on Main Street more difficult. Let's hold people and businesses more accountable and responsible for what they do and how they do it.

But that doesn't suddenly equate to support for the legislation now being considered by the Senate. In exactly the same way that the public wanted healthcare reform, just not Obama's healthcare reform, they want something done to punish the perpetrators of the financial meltdown, but not at the expense of their own checking accounts -- or American economic freedom.

The dirty secret of the Senate financial reform bill is that some of its biggest supporters work on Wall Street. Recipients of taxpayer bailout money have no concerns about the bill -- in fact, the CEOs of Citi and Goldman Sachs have publicly endorsed it, and several of the other big banks have expressed support. It keeps the "too big to fail" guarantees in place for another generation of financial services companies.

But here's where it gets really interesting. The Democrats supporting the current legislation have assured an anxious electorate that whatever funds are used to create whatever regulatory scheme created will come from the banks, not the taxpayers. Let me emphasize that so that even casual readers will catch it: the Democrats promise that you won't pay for their legislation, banks will.

Really?

Since when have corporations ever paid taxes, fees or penalties? Employees end up paying in the form of lower salaries and benefits. Customers end up paying in the form of higher costs.

And in this case, every account holder will be forced to pay higher fees on their checking account and savings account. That's you, my friendly reader. Can you say "checkbook tax"? I can, and I think lots of candidates will be saying it come November. Is that what you really want to do to your constituents, Senator Lincoln? Is that what you really want to explain on the campaign trail, Senator Bennett?

But it goes deeper than just taxation and regulation. Wall Street can pass it all onto consumers. Main Street cannot. And that's because Wall Street firms have all those pesky well-connected, nicely dressed lobbyists to ensure that whatever is passed strengthens their hand at the expense of the little guy.

Regardless of what side you're on, the financial reform bill is special interest heaven -- a bill written by lobbyists, for lobbyists, and will probably be implemented by lobbyists. The Dodd bill has carve-outs right from the get-go. Real estate agents, title companies, the Farm Credit system, even Fannie Mae and Freddie Mae are exempt from its onerous and costly provisions. And for everyone else, it's been a special interest feeding frenzy.

More than 130 companies have publicly hired lobbyists seeking their own loophole. Mars Candy wants to continue to use derivatives to hedge against price hikes in sugar and chocolate, so they've hired a lobbyist. Harley Davidson wants to protect dealer financing of their bikes, so they've hired a lobbyist. And eBay wants to not harm its subsidiary, PayPal, so they've hired ... well ... a team of lobbyists.

But most average Americans -- the ones who bailed Wall Street out in the first place -- cannot afford lobbyists, and won't be exempted from the legislation.

There's a reason why American trust in government is at an all-time low. Voters believe legislation like this is passed not for the public interest, but for special interests. And that is certainly the case with the Dodd bill.

Sen. Dodd has bragged that his legislation will create a new super-regulatory agency like we have not seen before -- and with good reason. Every single financial transaction will now be subject to government regulation -- from layaway plans to auto loans. Citibank and Goldman Sachs don't have to worry about that, but Joe's furniture store and Jane's used car dealership do.

I've said it before, and I'll say it again: it's not what you say; it's what people hear. Democrats believe they have a winning issue in financial reform because it gives them the vehicle to attack Wall Street. Well, they're right, but only right now.

The American people are once again hearing the same old song of more taxation, more regulation and more litigation, all because of well intentioned (you read that correctly) but poorly executed legislation. They will reject this approach just as they came to reject the healthcare reform legislation -- even after the vote.

Democrats -- especially those in conservative districts -- were promised a bounce if they voted for ObamaCare. We didn't even see a dead cat bounce. Just ask Blanche Lincoln -- but you better ask her quickly.

Instead voters have been inundated with information such as a recent HHS memo that confirmed what opponents of the legislation were saying -- the bill would not reduce spending or the deficit after all. Voters will soon find out that the financial reform bill won't end bailouts -- it will enshrine them into law.

Purple and red state Democrats will spend their summers back home explaining their votes to angry voters upset about the never-ending growth of government spending -- and the taxes and fees to pay for it. These are the same voters that supported Barack Obama in 2008, Chris Christie and Bob McDonnell in 2009, and Scott Brown in 2010 -- all for the same reason.

Americans want to change the direction of their government, and they will keep replacing incumbents until they get it right.

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Click here to read Simon Johnson's response to Frank Luntz