06/15/2010 05:12 am ET Updated May 25, 2011

Big Fight Over Financial Reform

I am not an economist or a policy wonk, I am just an old political hack. But I do know one thing about banking policy that way too many economists and policy wonks don't seem to be aware of: anytime anyone gets too much power, good policy and smart regulation and sound economic theories and formulas all get trumped. That's what Paul Krugman and all the other smart economists who don't prioritize breaking up these big banks don't get: the big six banks have accumulated way too much market power and political power. Until and unless they are tamed, our democracy and our economy will be fundamentally damaged. With the power they have, these massive conglomerates will overwhelm markets, make outrageous financial gambles that they know they will never be punished for, buy off way too many politicians, court and convert and capture regulators. With them so powerful, our real economy will have trouble getting back on its feet, and even if it does, their manipulations could rapidly send it spiraling toward destruction again.

The pluralist political theory our Founding Fathers developed in crafting the American political system has its flaws, but it works pretty well if power is actually distributed widely as they theorized it would be. If a wide variety of regions and industries and constituencies and interest groups all have a fair amount of power, our system has the potential of achieving fair and sensible outcomes. If any one sector has way too much power and wealth compared to everyone else, we have a big problem, and these big banks have way, way, way too much. It corrupts our entire system and you don't have to be an economist to understand why that's bad.

So let's be clear: neither the House nor the Senate finance reform bills does nearly enough to break up these banks or curb their power. But there is an interesting political dynamic going on here that is encouraging to me. Voters are so angry at Wall Street that the overwhelmingly outspent and undermanned reformers have a shot at making some decent gains. Congressional reformers like Alan Grayson in the House and Ted Kaufman in the Senate have been effective in pushing their ideas. The progressive coalition on the issue, Americans for Financial Reform, even though it's been outspent on a magnitude of about 200 to 1, has been remarkably effective in coordinating the lobbying and messaging of progressive groups. On the Republican side, Mitch McConnell made a serious mistake by going to a Wall Street fundraiser and then showing up on the Senate floor a couple of days later with an opposition statement echoing a Frank Luntz message memo on how to kill banking reform word for word. Meanwhile, the White House and Democratic leadership see this as a fight they want to have, and understand the politics is better for them if they push for a stronger rather than weaker bill.

There is no way to know yet how all of this will turn out. In 21st century America, one should never bet against big corporate interests with as much money as these bankers have. It is still quite possible that we could see the Senate bill get worse, and the conference committee could come out with a really disappointing bill. But there's also a chance that the politics of the issue and the reformers' work will pay off. If you actually got a bill coming out of conference committee that combined the best (or close to it) of the House bill with the best (or close to it) of the Senate bill, that would not be enough to break up these big banks and rein in their power, but it would be a pretty decent first step. Let's keep fighting for it.