THE BLOG
06/26/2010 05:12 am ET Updated May 25, 2011

Cartoon: Tea Party Puppets

The upcoming battle over banking regulations promises to have every bit of the nutty gasbagging we witnessed last summer as the health care debate raged. That bit of nastiness brought us the Tea Party, which was quickly seized on by Republicans as their ticket back to the big leagues.

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There are a couple of aspects of the bill making its way through the bowels of Congress that are likely to be the fault lines of the discussion, and provide fodder for a splendid bloom of passionately misspelled signs this summer. I'll run through them briefly:

1. The bill does not split the banks into smaller entities. This seems anti-progressive at first. After all, who doesn't like a good Roosevelt-style trust-bust? But 15 smaller banks going belly-up, all of whom would have sunk just as many bucks into derivatives as one big one did, would not be any easier to clean up. Maybe even harder.

2. Non-bank financial institutions will be regulated by the Fed, and a 50 billion dollar fund would be set up for the purpose of "resolving" one of those institutions if (when) they fail. The GOP is protesting both these bits as formally designating huge institutions, "too big to fail," therefore giving the go-ahead to nutty risk-taking while laying waste to free market competition.

The first point is probably semi-valid, but these guys are serial nutty risk takers. If it isn't credit default swaps, it will be some other thing. The competition argument is just silly. Creditors are already quite aware of which institutions are "too big to fail," and make their loans accordingly. Because of the way the worldwide financial industry has expanded over the last 20 years, we are going to have to live with "too big to fail." The question is how we manage such behemoths. Crocodile tears over a damaged free market are simply a ploy by the GOP's fat cat funders to avoid regulation.

3. Regulation of securities firms will fall to the FDIC, who has never dealt with institutions of such enormous size before. Also, it is not funded to deal with them. Shelia Bair, the current head of the FDIC has said quite unequivocally that she can handle it, and that the FDIC is really the only one that can. And of course, funds for either an independent new agency within the Fed or, for the FDIC to expand into its new role, will be provided.

There's more, but why get ahead of ourselves? Grab a beer and pop up some corn. The fun is just beginning...

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