Congress' regulatory restructuring job for August: Shut down, restart

There's evidence in today's Financial Times that idealists live on — on Capitol Hill. Sen. Mark Warner, D-Va., published an op-ed in the paper arguing for the creation of a single financial regulator. Released as the regulatory restructuring hubbub in Washington comes to a temporary halt and the last remaining lawmakers depart the District for their August recesses, Warner's piece demonstrates how very little progress policymakers have achieved in their attempts to fix a broken system.

And Warner isn't the first committee member to suddenly veer back toward a single prudential regulator. After weeks of intense discussions and a grueling hearing Tuesday in which Senate Banking Committee members — Warner among them — got to hear from regulators themselves on their views of the Obama administration's restructuring proposal, the debate should be more advanced by now. Instead, Senate Banking Chairman Chris Dodd, D-Conn. is himself questioning the practicality of multiple bank regulators. Warner, for his part, expressed concerns that having more than one bank regulator would allow for continued regulatory capture and arbitrage, and would uphold an "inefficient, unaccountable, and expensive" system. The White House, through its representative Treasury Secretary Timothy Geithner, either failed to anticipate a deviation this wide or is stubbornly refusing to acknowledge the senators' concerns.

The administration released its regulatory restructuring proposals with the idea that lawmakers would take the month of August to contemplate them and begin working toward a consensus. But its efforts to help create that consensus have failed so miserably that officials should begin as soon as possible on a different August errand: restructuring regulatory restructuring.

When they first began, the architects of the new plan valiantly tried to assess and put forth what was "politically possible." While their proposed plan first seemed to have grasped that concept, Geithner's maneuvering — or lack thereof — has since eviscerated it. Politically, Geithner has made things impossible — for the moment.

There's a silver lining, however. As the current proposals arc downward in spectacular flames, officials at the White House and the Treasury will essentially have the chance to think of something new. Sure, they'll have to account for political realities while they're cogitating in this swampy, empty August heat, but they'll also be, in an important sense, free.

Lawmakers may also need to step up their game. If they don't like the administration's plan, they should try to come up with something on their own. It isn't clear where this new affinity for a single regulator is coming from, though it likely has a source with a deliberate mission. But regardless of its origins, the Senate Banking Committee should run with it and try to formulate a legislative outline. A good example of how this can work is the effort Rep. Barney Frank, D-Mass. and Rep. Collin Peterson, D-Minn., have made together to outline new regulations for credit derivatives. The Treasury has yet to release its derivatives bill, and the details Frank and Peterson have been able to fill in already surpass the ideas on derivatives regulation Geithner has put forth in recent Congressional testimony.

There are threads of agreement on the Senate Banking Committee that could turn into something concrete. The idea of a systemic risk oversight council with an independent head — and the corresponding rejection of the Federal Reserve as a potential systemic risk regulator — has solid backing there. With some initiative on Dodd's part, the committee could build momentum in the regulatory restructuring debate.

Summer break can be a transformative experience — Americans know that well. By the time the Hill fills back up again next month, regulatory reform could be slimmer, sleeker and more beautiful. Even the biggest cynics must admit that, given the current state of disarray, anything is possible.