Bank Error

Loosening regulations on big banks won’t save red-state Democrats.

Sen. Mark Warner.
Sen. Mark Warner.
Photo illustration by Slate. Photo by Paul Morigi/Getty Images for ResearchAmerica.

On Tuesday, 17 members of the Democratic conference in the Senate joined the Republican majority to weaken banking regulations passed under Dodd-Frank. Their case for backing the bill, which opponents say will damage oversight needed to prevent another financial crisis, is partly practical—Democrats like Mark Warner of Virginia are worried that small banks and lenders are overburdened by current regulations—and partly political.

Supporters like Heidi Heitkamp of North Dakota, Joe Donnelly of Indiana, and Jon Tester of Montana are centrist Democrats in deep-red states that voted overwhelmingly for President Trump. By showing their bipartisan bona fides, they hope to win crucial support back home. But as they champion a bill that raises the odds of another financial crisis, they should remember that voters don’t always reward displays of bipartisanship.

Take the Senate Democrats who tackled the 2009 stimulus package.

President Obama, facing a dire economic outlook, wanted $800 billion to pump into the economy. Following this recommendation, the House of Representatives, under Speaker Nancy Pelosi, approved an $819 billion plan for stimulus. The Senate, in its initial push, went even further, assembling $930 billion in spending.

The economic case was straightforward: By the end of 2008, the recession had produced an output gap—the difference between actual production and the economy’s potential production at full capacity—of $2 trillion. Multiple economists outside the transition team urged at least $1 trillion in spending, while within the Obama circle, economic adviser Christina Romer argued for a stimulus that topped out at $1.2 trillion.

The political case was easy too: Voters reward performance, and a larger stimulus would likely mean a faster recovery. Democrats would fare better in a world where they pumped as much money into the economy as they could manage. Mitch McConnell made this point as he planned Republican opposition to the stimulus package, reminding members that the economic boom that carried Ronald Reagan to re-election also delivered victory to congressional Democrats. Stop or damage the stimulus, and they could do the same to Obama’s political prospects.

But rather than run with momentum, a group of centrist Democrats—Ben Nelson of Nebraska, Evan Bayh of Indiana, Mary Landrieu of Louisiana, Mark Begich of Alaska, and Claire McCaskill of Missouri—worked with several moderate Republicans to pare down the Senate package. “The overall number was getting way too big to manage,” said Begich. “The goal was to get a lid on it. We said, under 800 [billion], no more, we cannot go above that.”

They won the fight. The stimulus that passed the Senate, and eventually became law, was just $787 billion. The moderates had shown their willingness to get tough and impose some fiscal discipline. Unfortunately, it came at the expense of the economy. The stimulus was just big enough to arrest the nation’s economic free fall but not so big that it could spur a rapid recovery. The country would face a prolonged period of slow growth.

Were these Democrats at least able to save their seats? No. The only senator in the group to survive the subsequent midterm elections, in 2010 and 2014, was McCaskill. The others either lost their seats or retired before they could face voters again. Their posturing meant little, in the end, and came with a real cost.

The situation in 2018 is obviously different. Proponents of the Senate bill, called the “Economic Growth, Regulatory Relief, and Consumer Protect Act,” say they are correcting a mistake in the original Dodd-Frank legislation. “Literally, from the night of the conference on Dodd-Frank, there have been discussions about the need to go in and make some fixes,” said Senate Banking Chairman Mike Crapo, a Republican from Idaho and the lead author of the bill. To reduce risk in the financial sector and prevent another meltdown, Dodd-Frank established tight thresholds for federal oversight. Under the law, banks with assets of $50 billion or more are considered “systematically important financial institutions” and subject to enhanced scrutiny from the Federal Reserve.

The Senate bill would lift the threshold to $250 billion, giving some small and regional banks relief from federal regulators. The bill would also give relief to small banks and credit unions by allowing them to expand the kinds of mortgages they offer and exempting them from the Volcker Rule, which prohibits banks from making risky investments with their customers’ money. In a less conspicuous move, the bill also exempts the great majority of lenders from reporting requirements that help the federal government monitor discriminatory practices or predatory lending.

The first change, at least, isn’t without merit. Former Rep. Barney Frank, who helped write Dodd-Frank and retired after its passage, believes the threshold could be lifted to $125 billion to create space for more competition among small banks. But, he argues, the Senate bill goes too far. A fact sheet from the Center for American Progress is blunt about the impact. Under the law, “25 of the 38 largest banks in the United States would no longer be subject to stronger capital and liquidity rules,” despite holding a collective $3.5 trillion in assets and taking tens of billions in relief from the Troubled Asset Relief Program.

Perhaps voters will ignore the actual policy at hand and reward Democratic supporters for reaching across the aisle. Perhaps Democratic base voters in states like Virginia and Colorado will forgive their senators for handing a win to Wall Street and increasing the odds of another financial crisis. Or perhaps, in an age of hyperpolarization and anti-Trump intensity, bipartisanship for its own sake is far more likely to backfire than win votes.

The lessons of the past eight years say these Democrats are setting themselves up for failure. But with just eight months before the midterm elections, we’ll find out soon enough.