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“Something is rotten in the state of banking.” Alright, that isn’t quite how the Bard put it, but you take my point. Our nation’s ongoing financial crisis – just shy of a year in the making – is far from over. Indeed, with unemployment and budget deficits at record highs (the ‘worst since the Great Depression’, as the official administration line goes) it seems like we’ve just skimmed the surface and Americans are madder than they’ve ever been – a point about which congressional Democrats, with eyes fixed on 2010, are rightfully nervous. But even as populist anger has surged in the months since the first bank bailouts, there is scarcely a consensus about how lawmakers ought to proceed – that is, to curtail the excesses of the banking industry and its ability to send shockwaves through the larger economy. Of course, there are some (particularly on the right) who would take issue with the problem, stated as such, but as the evidence mounts it’s becoming harder to ignore the implications – that, as Dean Baker concludes in his recent piece, “The Big Bank Theory”, the complicity of the banking industry is incontrovertible and regulation is not merely prudent, but necessary.

A cause célèbre among liberals, financial regulatory reform has become the most recent partisan boxing match on the Hill, following a stormy (and ongoing) healthcare battle. Evidence to the contrary notwithstanding, Republicans have wasted no time in making the case that regulation is precisely how ‘we got into this mess.’ With thousands more joining the unemployment lines daily, it’s becoming harder to sympathize with such a position. So far from offering a prescriptive solution, it offers platitudes. But slogans don’t feed families and they certainly don’t jumpstart faltering economies. That hasn’t stopped the debate from being fought at the ideological margins as a veritable referendum on capitalism. To its credit, Baker’s piece has no interest in such a discussion – indeed, he makes clear at the outset that regulation has nothing to do with a free-market story, but rather an equity story. Banks have been ready if not eager to line up for government checks when it behooves them. In fact, the insurance scheme implemented in the wake of the 1930s collapse, ostensibly a consumer protection, effectively insulates banks – particularly large ones – whose failure would cause systemic damage to the larger financial system.

Because the failure of large banks poses a non-trivial threat to the economy, government aid is a forgone conclusion. What’s worse is they know it. To offer government insurance of deposits without also regulating the behavior of its recipients would be akin to an endorsement of reckless behavior – the kind that penalizes smaller banks who get swept up in the storm, despite abiding by conventional, low-risk strategies. As Baker notes in his piece, “The banks presumably understood the risk that they were taking in making loans in the first place. They are in the business of distinguishing good credit risks from bad. A financial institution that is unable to make such distinctions is misallocating capital.” Hewing to a capitalist argument, then, shouldn’t it follow that the government ought not to intervene and merely let the market do what it will, shuttering the windows of banks who are unable to compete? I sense the boardrooms of America would chafe at my glibness, but the point remains: if you want to be consistent in your ideological arguments, one can’t ignore the double standard by which the banking industry has managed to reap the benefits of government intervention while actively resisting meaningful regulatory changes.

Although the regulatory fight is only just getting started, the administration is taking preliminary steps to address the problem with President Obama’s decision this afternoon to implement a tax on TARP funds to recoup the projected $117 billion in losses from the original $700 billion loan program. In strikingly populist language, the President made it clear that stalling tactics would not prevent his administration from doing the people’s business, calling on Wall Street to “meet [its] responsibilities.” Some 50 companies are expected to fall under the new guidelines. It also represents a major shift in existing policy, where administration officials like Secretary Geithner previously asserted that such a tax would merely be passed on to the consumer; these pressures are expected to be minimal since the tax is targeted and affected companies will presumably still have an incentive to remain competitive. Industry spokesperson Steve Bartlett called the move “strictly political” and maybe it is. But that doesn’t mean it wasn’t the right move. Nor by any means should it be the last.