Financial regulation could be the linchpin of Congressional budget negotiations

Bloomberg News

WASHINGTON — One of the benefits of writing about banking for a living is that it's specialized. There's a finite universe of things that I have to know and care about, and while that may seem limiting at first, there are infinities within the confines of bank-related topics that can be profitably explored for years, or even a lifetime.

But the downside is that those banking issues only occasionally break through to the public consciousness or the wider public discourse, and when they do it's usually because something has gone spectacularly wrong. The banking crisis earlier this year was one example of this; the 2008 global financial crisis is another, though taken to an uncommon extreme. 

So when the House of Representatives unveiled its opening bid for budget negotiations to keep the government funded, it was with some surprise that we learned that the big news of the day was actually quite intertwined with the financial regulatory issues we talk about all the time. 

Among the many stipulations in the budget proposal, the House bill would slash the Treasury Department's budget by $1.2 billion, subject the Consumer Financial Protection Bureau to Congressional appropriations, cut the budget for community development financial institutions and anti-money laundering rules, and crack down on the Securities and Exchange Commission's enforcement powers. 

That Congressional Republicans want these things is not surprising — many of those provisions have been sought before in various forms — and in a negotiation it is common to start by asking for everything you can possibly want with the expectation that most of what you ask Santa for won't be under the tree on Christmas Day. 

But by including all of these provisions in the budget proposal, Republicans raise the possibility that one or more of these big-ticket items will end up being the axis on which these negotiations turn — and that one of those provisions will be traded off to protect another. Perhaps Republicans will come to accept that the administration will not agree to subject CFPB to appropriations — but will the administration agree to, say, cut the CDFI fund as a concession? 

I don't know the answer to that question — nobody does — and something as sprawling as a budget bill leaves its own infinities of possibility on what might ultimately make the cut and what won't. But the fact that these issues and programs are on the block means that there is a distinct possibility that one or more of them could make their way into law. Take for example the 2017 budget reconciliation package that opened the Arctic National Wildlife Reserve in Alaska to oil drilling — that's a similarly intractable issue that made its way into law through a very similar route, albeit under very different political circumstances.

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The political circumstances under which this current round of budget negotiations are taking place, meanwhile, are notable for being highly unpredictable. Conventional wisdom would hold that a party that holds a five-seat majority in one chamber of Congress would be in a relatively weak negotiating position and might set its sights on some low-hanging fruit and move on. Alternatively, both sides might calcify their positions and let the government shut down, only to eventually relent and pass something relatively conventional a week or a month later.  

But this is the YOLO Congress, and the Republican party seems intent on extracting major concessions from the Biden administration, so much so that they threw out their last speaker for being too conciliatory and elected a new one who would tow a harder line. That gives Speaker Mike Johnson a lot of incentive to hold out for something big, and that big thing could be a provision that has major implications for the administration's financial regulatory agenda. 

Again, none of this means that the CFPB's funding structure or the SEC's enforcement powers will definitely be the focal point of these negotiations. There are many more avenues for the government to end up being funded without affecting financial regulation at all. But it does mean that they are sufficiently important to the Republican leadership that they are among the items they want to negotiate over in this budget go-round. And this time, nobody really knows how it's going to end.