TOUGHER OVERSIGHT of Wall Street will mean more stability for financial firms and consumers alike, but it will cost money up front. This week, US Senator Scott Brown came out against the most reasonable way to pay for implementing new regulations. House and Senate negotiators, led by Representative Barney Frank and Senator Chris Dodd, responded immediately by cobbling together a workable Plan B. Brown has not pledged his support for the new measure, but it is well worth passing.
Brown, to his credit, played a pivotal role this spring in the reform effort, when he bucked his party and supported a Democratic-led financial-reform bill in the Senate. But the junior Massachusetts senator apparently was caught off guard last week when a House-Senate conference committee opted to pay the costs of the new regulatory system by imposing a tax that would raise $19 billion over five years from big banks and hedge funds. Once Brown issued a letter opposing the tax, Dodd and Frank went back and found another source for most of the necessary money: The revised bill would redirect about $11 billion from the federal bailout program to cover the cost of the new rules. It’s a jury-rigged approach, but it’s the best option if Brown and other Republicans oppose the more straightforward bank tax.
In principle, the money needed to regulate the financial system adequately should come from the financial sector. A tougher regulatory system is needed because big banks’ past excesses triggered a global financial crisis, and lawmakers shouldn’t take money from other initiatives to save Wall Street from itself. Brown argues that financial institutions would simply pass the tax on to consumers. But in a competitive marketplace, that’s harder to do; banks, their shareholders, and their plushly-compensated managers would have to absorb some or most of the costs.
Brown’s letter implicitly recognizes that tougher oversight involves some costs. But he proposes instead that the money come from cutting “unnecessary federal spending.’’ While all such spending should by definition be eliminated, Brown’s letter does not specify any. Besides, coupling financial reform with an effort to cut, say, farm subsidies or duplicative weapons would only muddy an already complicated debate. Such savings should be pursued on their own merits, and the proceeds could be devoted to deficit reduction or a host of other worthwhile priorities.
More than his Republican colleagues, Brown has tried to steer a moderate course on financial reform, accepting the need for closer regulation while looking out for the concerns of local employers such as MassMutual and Fidelity. But the final vote on the financial bill will present him with a stark choice: Impose reforms that reassure the public and promote sound markets, or go back to letting Wall Street do whatever it wants.