L ast week the SEC filed a civil fraud suit against Goldman Sachs. Coincidentally, President Obama is now stumping for financial reform, using the Goldman Sachs case to illustrate the need for reform.

Democrats have found one issue that could put them on the side of independent voters before November. Any Republican opposition to the Democratic bill can be portrayed as fighting for Wall Street fat cats. Realizing that, Senate Republicans are backing away from threats of a filibuster.

Will the proposed bill end the cycle of boom and bail-out? The opposition says no. That`s probably right, but has less to do with the bill than with the nature of Congress. Congress` appetite for bailouts has only grown over time. The reform bill cannot prevent a future Congress from bailing out large corporations–whether it be industrial firms or Wall Street firms. Still, the bill attempts to create a new system for liquidating failed firms, including an industry-financed fund of $50 billion to ease the liquidation process.

The one reform Congress won`t adopt is returning to the world in which commercial banks and investment banks were forced to maintain separate ownership. The Glass-Steagall Act built a wall between ownership of commercial and investment banks in the wake of the 1929 market crash. In 1999, both parties overwhelmingly repealed the Glass-Steagall Act, saying it was necessary to ensure U.S. competitiveness with global financial competitors. Wall Street was deemed smart enough to avoid past mistakes. The result? Tearing down that wall of separation contributed greatly to the financial bubble and subsequent collapse. By repealing Glass-Steagall, Congress hoped that the fear of losses would cause the Gordon Gekkos of the world to moderate their greed for risk. The financial collapse demonstrated the folly of abandoning restraints on ownership.

Obama`s reform effort is taking fire from progressives as well as Republicans. Former Clinton Secretary of Labor Robert Reich says the reform bill does not go far enough. He contends the bill will strengthen the largest banks at the expense of their smaller competitors.

Reich says “resurrect the Glass-Steagall Act in its entirety so commercial banks are separated from investment banks.” He describes commercial banks as lending institutions and investment banks as operating in a casino called Wall Street, an apt description.

An alternative approach to reform is to create additional regulatory bodies and grant greater discretionary powers to bureaucrats. The hope is that regulators will make better decisions than the banks themselves. Where there is wide regulatory discretion and oversight, there is wide latitude for lobbying and corruption. Expanding regulatory discretion won`t ensure financial security. Regulated firms routinely seek to influence the regulators charged with overseeing their industry. It only takes a few well-placed people to undermine efforts at effective enforcement.

This week the Pew Research Center released a poll showing that just 22 percent of respondents trust the Federal government about always or most of the time. The average voter gets it. After all, our entire system of government is designed to restrain the exercise of government power.

Still, the largest financial institutions have proven themselves unwieldy. Record profits at such firms were built on speculation, excess leverage and even fraud.

Reich`s approach has the virtue of certainty for all concerned. Limiting the size of banks and separating commercial banks from Wall Street would mean that no firm was truly too big to fail anymore. Reich also calls for all derivatives contracts to be traded on public exchanges. The murky accounting around such contracts was a factor in the speculative bubble. It is also at the heart of the Goldman Sachs case, where a hedge fund helped structure a pool of mortgages to be sold by Goldman, then bet the investment would fail.

Reich`s proposal could sway many voters who objected to the bail-outs–both by President Bush and by President Obama.

Send comments or suggestions to barroompolitics@live.com.

The opinions expressed on this page are those of the authors and not the Trail-Gazette or its staff.*