WASHINGTON — Eighteen months after the near-collapse of the U.S. financial system, lawmakers in the nation's capital still can't agree on how to fix what went wrong, despite the abundant evidence of the economic devastation the crisis has caused.
The House of Representatives passed a sweeping overhaul of financial regulation in December, but the legislation is now tied in knots in the Senate. There, Democrats and Republicans have argued fruitlessly for months while Americans feel the aftershocks of the meltdown in the form of high unemployment, record lengths of joblessness and a historic plunge in lending.
The House legislation, patterned largely on the Obama administration's blueprint, tackles everything from first-ever regulation of complex financial instruments to new bankruptcy-like powers to liquidate giant financial institutions if their problems threaten the broader financial system.
The biggest obstacle to agreement remains the administration's proposal for a stand-alone Consumer Finance Protection Agency to police credit products such as mortgages, credit cards, student loans and even payday loans.
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Senate Banking Committee Chairman Chris Dodd, D-Conn., has floated a compromise with Republicans to scrap the stand-alone requirement for the consumer protection agency in favor of one that would be independent but housed in an existing bureaucracy, such as the Treasury Department or perhaps the Federal Reserve.
"Things continue to move very well," Sen. Bob Corker, R-Tenn., one of two GOP senators negotiating with Dodd on compromise language, said Wednesday. "We're closer on a couple issues, but I'm not going to say any more."
Another influential Republican was more direct.
"There will be a bill, but it will be very much cut back from what the House passed," said Iowa Sen. Charles Grassley, R-Iowa, the top Republican on the Senate Finance Committee. "There will be consumer protection, but probably not under a separate agency. I don't know where it could be housed."
Those comments, however, reflect a fight over an address and not the more substantive question of what the agency's consumer-protection powers would be. That's the issue on which lines are being drawn in the sand. Neither Democrats nor Republicans appear ready to blink, and the impasse could doom the legislation.
"The debate about where it is, is not insignificant, but most significant is what powers will it have? Will we be able to do something about what happened to consumers over the last few years?" Dodd asked on MSNBC Wednesday.
The U.S. Chamber of Commerce, lobbying hard against the new agency, was unmoved.
"For us it's less about the address of the agency and more about what it would be able to do. Our concern here has been that this new agency or independent division would have these very broad regulatory authorities that would, at the end of the day, choke off the availability of credit for small business and consumers," said Ryan McKee, senior director of the U.S. Chamber of Commerce's Center for Capital Markets.
Business groups and banks fear that the consumer-protection agency could impose costly regulations, raising borrowing costs for consumers and companies.
Consumer groups argue that federal bank regulators failed miserably to protect consumers because they consider banks, not consumers, their constituents. Leaving consumer protection up to the regulators who failed consumers preserves the status quo, they argue.
"We do not believe banking regulators, or any committee or group of those regulators, should be given any authority to veto or delay important consumer protections," Pamela Banks, senior counsel for the Consumers Union, the publisher of Consumer Reports magazine, wrote to Dodd on Wednesday.
"Moreover, as we have seen, inaction and delay by banking regulators is what allowed the subprime (mortgage) crisis to fester in the first place, threatening the near collapse of our economy."
Treasury Secretary Timothy Geithner met Wednesday with representatives of 30 advocacy groups and assured them that he won't back off a core goal of strong consumer protection.
"To us, he said, that means a dedicated authority with the independence and capacity it needs to be accountable and effective. He said that real accountability requires real independence to make and carry out decisions; independent leadership appointed by the president and confirmed by the Senate; independent budget and administration; independent ability to set clear rules for the consumer financial services marketplace and enforce them," said a Geithner aide, on the condition of anonymity to speak more freely.
He was preaching to the choir.
"We urged them to continue to stress the need for an independent consumer regulator that has the power to oversee all players in the financial market place, whether they are banks or not, and it has strong enforcement authority," Travis Plunkett, the legislative director for the Consumer Federation of America, told McClatchy.
So with businesses, banks and consumer advocates all digging in their heels, is it a stalemate?
"I definitely wouldn't call it a stalemate. But I would sound delusional if I said something definitely was going to happen," said Plunkett, noting that substantive talks are taking place in the Senate. "It's pretty clear right now that the banks hold the upper hand. All the movement on policy is on what the banks have wanted. I think a lot of people would find it surprising that large banks still have that much power."
Eighteen months after September 2008, when investment banks collapsed and threatened to topple others, prompting government intervention, the urgency for change is waning.
"From an economic point of view, we have time to do this right, and there is a lot of disagreement over what we do. Politically, it is important to get it done this year . . . . There is a danger that the longer it goes, the less reform we get," said Douglas Elliott, a former investment banker turned researcher at The Brookings Institution, a center-left policy group in Washington.
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