Is Consumer Protection the Public Option of Finance Reform?

Never mind the Massachusetts race and health care reform. The Democrats have something else to worry about, too: Protecting Joe Consumer from the big, bad banks.

The political world’s atwitter speculating about what the Democratic debacle in Massachusetts will mean for health insurance reform. But the rapidly diminishing fortunes of the Senate Democrats are already evident in a quieter, yet equally consequential policy debate: Whether—and how—Washington will ensure that Joe the Consumer gets a fair shake from the big banks.

The Dems’ point person on that question is veteran Sen. Chris Dodd from Connecticut, who chairs the Senate Banking Committee. Yes, that’s the same former presidential hopeful who has chosen retirement rather than face certain defeat in November. So perhaps it’s no surprise that Dodd, once bullish on the subject of financial reform, appears to have downsized his ambitions on this question, too.

The political centerpiece of President Obama’s financial reform package is a new agency dubbed the Consumer Financial Protection Agency. Once upon a time, it had no more spirited defender than Dodd. Responding to the banking lobby’s objection to the idea back in June 2009, he railed, “The very people who created the damn mess are the ones now arguing that consumers ought not to be protected.”

By last week, though, Dodd’s tone had changed. Actually, he’d gone mum, but multiple press reports revealed that he is now working on a deal with the Banking Committee’s ranking Republican, Alabama Sen. Richard Shelby—a deal that would drastically water down the proposal in order to win GOP support for broader financial reforms. This, of course, won’t work—making it bad politics that will result in worse public policy. But that’s the Democratic way these days.

The GOP is just as eager to bog the White House down with fixing Wall Street as they were with remaking health insurance. Republican leadership long ago publicly swore off supporting any part of Obama’s agenda, so why start now? Why hand the Democrats a popular, easily understandable victory against the banks to campaign upon? As the Washington Post’s Ezra Klein put it, consumer protection is “the public option of financial reform.”