Mere days after passing health care reform, Democrats are declaring that financial regulatory reform will be their new top legislative priority. Senator Chris Dodd has already put forward a reform bill, which was swiftly passed by the Senate Banking Committee. But, just like health care, this reform campaign will not be easy. Here are the policy and political challenges ahead.

  • What Dodd Is Proposing The New York Times' Sewell Chan lays it out. "Described as the most sweeping change in financial rules since the Depression, the legislation would create a council to detect and avert systemic risks to the financial system; expand the Federal Reserve's oversight over the largest and most interconnected financial companies; create a consumer financial protection agency to regulate mortgages and credit cards; and regulate many of the over-the-counter derivatives that amplified the risk-taking that brought about the 2008 financial crisis."
  • The Ambitious Timeline  24/7 Wall Street's Douglas McIntyre projects, "The target for financial reform is now being set within the next month, presumably meaning a passage goal of April or by Memorial Day. The target is definitely that the new legislation can be sent to President Obama before Congress adjourns for the year. Maybe early May."
  • How This Is Different from Health Care The Times' Sewell Chan notes that this political battle is going to be very different from health care in one big way. "In contrast to the economic stimulus and the health care overhaul, where the White House outlined broad goals but largely left it to Congress to shape the legislation, the administration has been intensely engaged in drafting the legislation."
  • Congress Must Address 'Volcker Rule' EconoBlogger Mike Konczal thinks Congress is trying to weasel its way out of deciding on behalf of or against the so-called Volcker Rule. "It's almost like the one rule that's a clear rule, that would structurally change the industry in some way....it's like Congress doesn't want a vote on it. They'd rather kick it to someone else to deal with." The rule would restrict banks from proprietary trading.
  • Why I'm Pessimistic  Mother Jones' Kevin Drum isn't hopeful. "We have a House bill that at least has the right idea, even if it probably isn't either broad or deep enough. We have a Senate bill that, even before it goes through the legislative meatgrinder, is woefully inadequate. And we still have months and months of negotiations to get through, all of it done in the shadow of a massive lobbying campaign from every financial institution in the country to water things down even more."
  • Enforcing Regulations Tougher Than Passing Them  Economist's View blogger Mark Thoma worries that even if it passes, they won't enforce. "That is, when the time comes to actually implement this policy and use the resolution authority, will the government actually do it, or will fears of what might happen to the financial system lead government regulators to the more familiar route of bank bailouts? I think this is a real problem."
To address TBTF concerns, the bill is relying very heavily on resolution authority, as opposed to measures limiting firm size or leverage or interconnectedness through direct means or the use of strong incentives. So you ensure that some firms will be really big and systemically risky, and then you give regulators discretion to use or not use resolution authority. Discretion, under these circumstances, is exactly what you don't want. It creates doubt in markets that regulators will actually pull the trigger, which will lead to greater risktaking by firms, which will make it more difficult for regulators to pull the trigger in times of crisis.