The financial crisis on Wall Street and the impending bailout look to many like a tragedy slowly unfolding. The Bush Administration’s rush to pass legislation bailing out the financial markets has the Democrats scrambling to figure out how much of the proposal they can accept and what concessions will make it palatable to the American taxpayer.
But, what if the Democrats viewed it differently – as an opportunity?
And I mean an opportunity not just to plug the hole in the dike. But, an opportunity to reform the financial markets by returning to sound, appropriate regulation. What a concept!
Allowing Phil Gramm and his backers to tear down the wall between commercial banks and investment banks was a major factor that permitted the mortgage securities crisis to occur. Re-building that wall is crucial to reforming the financial markets, so that overly risky investments are discouraged. Requiring greater transparency of the risks inherent in certain financial instruments is also needed.
This is where the Democrats could play an invaluable role. Even though there is significant time pressure to find an appropriate solution to this crisis (and, yes, that will inevitably include some sort of purchase by the government of non-performing and lower-performing assets), what the Democrats are overlooking is the fact that they hold all the cards.
This crisis has given the Democrats more leverage than they have had in a decade to put forward and pass meaningful reforms. The Republicans cannot pass a $700 billion bailout plan without the Democrats. And even many Republicans are balking at Bush’s vague plan. Moreover, the Bush Administration is desperate not to have a financial crash of Depression-era proportions be its final legacy. What a great opportunity for the Democrats to dictate the terms on which any bailout will happen! Who knows when they will have this kind of leverage again?
The big question, though, is whether the Democrats will recognize this situation for the opportunity that it is. And, whether they will muster the courage to use this windfall of leverage that has dropped into their laps to pass much-needed reforms and return to sensible regulation of the financial markets.