Sen. Chris Dodd's decision not to seek re-election injects a new element of uncertainty into the congressional negotiations over financial regulatory reform. The House has passed a comprehensive measure, so the next move is up to the Senate.
As chairman of the Banking Committee, Dodd unveiled a 1,000-plus-page bill widely seen as a bid to get back in the good graces of his Connecticut electorate. The ranking Republican on the committee, Sen. Richard Shelby of Alabama, rejected it, and at last check the pieces were tied up in two-member bipartisan working groups. Perhaps Dodd's retreat from politics may make a compromise more feasible, but that is just a hope. This is still an election year.
There are almost as many points of contention in the financial regulatory debate as there are in the health-care debate - and the issues cut across party lines. Should there be a strong consumer protection agency to rein in subprime mortgages and other toxic "products," or would that stifle innovation and duplicate state regulation? Should the Federal Reserve retain primary regulatory responsibility over bank holding companies, or should all such power be concentrated in a single agency? Who is best positioned to monitor systemic risk? And so on.
On all of these questions, there are good arguments to be made on both sides. As debate proceeds, the test of legislative proposals will be the degree to which they embody certain principles.
Major players in Congress, the executive branch and the Federal Reserve probably had sufficient power to stop what we now know to be the riskiest practices during the boom. The fact that they did not do so has more to do with their sharing an upbeat herd mentality than with actual corruption or malfeasance.
Better financial regulation, and, in some areas, more of it, can help forestall the next crisis. Ultimately, though, you cannot legislate wisdom.