The Biggest Blunder on Financial Reform

Thank heavens President Obama is taking on financial regulation as his next priority. It’s our biggest economic policy issue by a long shot. The trouble is the pitch is all wrong and that’s why it’s shaping up to be a tougher fight than it should have been.

The White House wants to make sure that we “never again” have to bail out our big banks. But arguments in favor of safety work best during times of fear. More than a year has passed since the worst of the crisis, and during that time the fear has abated, at least on Wall Street.

For many ordinary people, financial reform still seems like a no brainer but not to bankers. To understand why you have to enter the mind of a Wall Street banker. Here’s what he’s thinking: “I (or my company) took a lot of risks. We effectively went bust. But the government got so scared that it bailed me out and all but a tiny minority of my colleagues. Most of us got to keep our money and our jobs too. And then the government showered us with limitless free money that we are using to make money hand over fist. Why, exactly, should I worry about another crisis? Things look ok to me. In fact, I strongly prefer keeping things just the way they are!”

There was a time not so long ago when bankers were scared themselves. Terrified in fact. The story goes that Hank Paulson (formerly Goldman’s chief) actually got down on his knees—his knees!—to beg Nancy Pelosi to pass the TARP bill. If some of our officials, like Geithner, Summers, Bernanke or President Obama had taken that opportunity to make the bailout conditional on smart reforms, there would have been nary a whimper. But alas the chance was missed, and with the passage of each day the strength and resistance of the bankers increases.

So what should the pitch be? Instead of appeals based on altruism or increased “safety” the focus should be on self interest. Putting people in jail or outlawing practices that are easily evaded won’t accomplish much. We have a unique opportunity to build a better, more valuable financial system. If the US seizes the opportunity and offers real leadership to improve the global system, Wall Street will benefit by continuing to be the global center of capitalism for years to come. That’s what a financial system less prone to cheating can do. It’s a message we can all get behind: politicians, the public and Wall Street. And it means bankers themselves can use their creative brain trust to help make the financial system better and stronger without waiting for Washington. (see Top 5 Ways for Wall Street to regain Trust)

There may not be a second chance.