It's becoming increasingly likely that regulation of the banking and financial sector is liable to be the issue that dominates the first half of 2010. Why? Well in the first place, it's badly needed -- there is fairly broad consensus among economists and regulators that there is still very profound systemic risk in the banking industry.
In the second place, it's not clear what else the Obama administration will do on the domestic policy front, once the health care issue gets resolved. Although the unpopularity of the cap-and-trade program is greatly exaggerated -- most polls in fact show it receiving a plurality or narrow majority of support -- the swing districts in 2010 tend to be big carbon emitters. Immigration reform, likewise, is liable to be a less favorable issue for the Democrats in 2010 than it will be in 2012, when we'll have a younger, more diverse electorate in which Hispanics play a larger role as swing voters. EFCA -- the White House's support for which has always been questionable -- almost certainly isn't going anywhere. Movement on gay rights issues is a possibility, but is more dependent on the White House's willpower than its bandwidth. A second omnibus stimulus bill is probably out of the question, although certainly there will be piecemeal efforts -- extended unemployment benefits, greater investments in transportation infrastructure -- that the White House will pursue. Still, for a hard-working White House, that leaves plenty of time on the table for a big-ticket item, and that item will probably be banking reform.
What's fascinating about this issue is how unevenly it breaks down along traditional political lines. The roll calls on the TARP bills that the Congress passed last year were among the strangest in the history of the institution, with divisions between leadership and rank-and-file, between service-sector states and manufacturing states, and between swing districts and safe districts -- all of which played a larger role than one's partisan affiliation.
From a 30,000-foot view, the debate will be between the Volckerists and the Summersists, with the Volckerists arguing that large financial institutions need to be broken up -- probably through something resembling a modern Glass-Steagall Act -- and the Summersists arguing instead for more extensive regulations.
The 'hard', online left will almost certainly take the Volckerist position. In fact, I expect this to be the "public option" of 2010, the badge of pride that "movement progressives" will use to distinguish themselves from "kleptocrats". Like the public option, the Volckerist position ("break up the banks") is easy and intuitive to understand. Also as in the case of the public option, I suspect the Volckerists will ultimately have the preponderance of polling evidence to show in their favor (although no polling has yet been conducted on the issue). In contrast to the public option, opinion among policy wonks is likely to be a little bit more evenly divided -- see for example the difference of opinion between Yves Smith and Simon Johnson, neither of whom have any inherent sympathy whatsoever for the banks.
How the right will respond is less predictable, but this may become the issue that tests whether the "tea party" movement is ultimately more libertarian or populist in character. While on the one hand, the zeitgeist within the movement is to bemoan any government intervention in the economy, on the other hand, much of the impetus for the movement was the bailout bill and the deference that both the Obama and Bush administrations have shown toward Wall Street. I really don't know how they'll come down on this issue (initially, perhaps, they'll take whatever position that the White House doesn't), but it could be a defining one for the movement.
Ultimately, I think there is more political upside than downside for the White House here, although there is plenty of both. I don't think the Republican Party as a whole can afford to take an anti-regulation stance. If they're afraid of handing Obama a bipartisan victory on the eve of the elections, they may simply argue that whatever type of regulation the Administration wants to do is the wrong kind. But without any agenda-setting powers, it's easy to envision them getting outmaneuvered. Meanwhile, the progressive left is likely to have a more specific viewpoint about what type of regulation is the right kind (Volckerist) and may drive the conversation on the issue, whereas the White House is liable to be reluctant to get engaged in a debate about details. Buckle your seatbelts -- it's going to be a bumpy ride.