Regulation urge grows at Capitol

Members of Congress responded to one of the worst weeks in recent memory on Wall Street with calls from both parties for stronger government regulation of the nation’s financial markets.

Few were ready to spell out just what that would entail, and lawmakers chose their words cautiously, aware of the jittery market that rebounded slightly Tuesday after dropping drastically on Monday.

{mosads}Both parties agree that long-term restructuring of the financial markets is needed and that it should be a priority for the next Congress.

“The more regulated institutions are being asked to come to the rescue of the lesser-regulated institutions,” said Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, which will hold a hearing next week to examine the possibility of further government intervention on Wall Street. “I think this is a pro-regulation statement.”

But short of that, and with just seven weeks left until Election Day, the market turmoil offered a preview of the political fencing yet to come.

House Speaker Nancy Pelosi (D-Calif.) on Tuesday said Democrats bore no responsibility for the financial crisis. She instead ripped President Bush’s “mismanagement” of the economy and the lack of regulation that led to the current situation.

“I think the American people have had it with this situation where the middle-income people in our country are not protected from the ramifications of the risk-taking and the greed of these financial institutions,” Pelosi told MSNBC.

When asked whether the Democrats “deserve some responsibility” regarding the economic crisis, Pelosi responded: “No.”

As further proof of the hyper-political environment, Democrats used the crisis to question a 1999 deregulatory law that unraveled Depression-era policies and that was sponsored by then-Sen. Phil Gramm. The Texas Republican stepped down over the summer as an adviser to John McCain’s presidential campaign after describing the troubled economy as a “mental recession” and calling Americans “a nation of whiners.”

Senate Majority Leader Harry Reid (D-Nev.), who voted for the 1999 law, spent part of Tuesday excoriating Gramm’s chief role in pushing through deregulatory measures that “paved the way for much of this crisis to occur.”

{mospagebreak}At a news conference Tuesday, Reid sounded open to repealing the 1999 law.

“It’s time to take a hard look at it, repeal it or change it,” Reid said.

Reid’s comments drew immediate reaction from Republicans, who questioned how bad the law could be if Reid himself and Sen. Joe Biden (Del.), the Democratic vice presidential nominee, voted for it, and President Clinton signed it.

The law, which was co-authored by then-Rep. Jim Leach (R-Iowa), now a supporter of Sen. Barack Obama (D-Ill.), repealed restrictions established in 1933 on cross-ownership of banks, brokerages and insurances. The law paved the way for a wave of consolidation between commercial and investment banks.

{mosads}Sen. Chris Dodd (D-Conn.), the Banking Committee chairman, was more cautious in his comments about the 1999 law.

“I wouldn’t go that far, but it’s certainly worth looking at,” Dodd said.

His counterpart on the Banking Committee, ranking Republican Richard Shelby (Ala.), who was one of eight senators to vote against the 1999 law, did not rule out repealing or significantly altering the measure.

“I wouldn’t go that far yet, but I think we ought to look at everything,” Shelby said.

Shelby said that new regulations could be added after a comprehensive review is conducted.

“There is nothing wrong with examining to see if we can improve it,” Shelby said. “Where have things fallen through the cracks?”

In the immediate future, Dodd is planning a series of hearings in the coming weeks to lay the groundwork for Congress’s response, including testimony his committee will hear Thursday from Treasury Secretary Henry Paulson, and next Tuesday from Federal Reserve Chairman Ben Bernanke.

Dodd has asked Reid to keep the Senate in pro-forma sessions — where no legislative business occurs — after Congress recesses for the year, in order to allow his panel to convene immediately should it need to respond to further turmoil in the markets.

Dodd said he would add language on a stopgap spending bill, which is needed to keep the government running past Oct. 1, to give homeowners the opportunity to negotiate new mortgages to stay in their homes. Dodd said the Fed wanted language in the continuing resolution to allow it to pay banks interest on their reserve funds.

Dodd also said he wanted the Bush administration to review whether Congress should create a new financial institution, like the Resolution Trust Corp., which liquidated thrifts during the 1980s savings and loan crisis, before taking a position on that issue.

But as both parties start moving toward regulation, some are urging caution.

“Government regulation can achieve a great result with just a light touch,” said Rep. Jim Cooper (D-Tenn.), a business school professor and former investment banker.