In spite of calls to break up banks from the left, the bill drafted by Senator Christopher Dodd and Congressman Barney Frank of Connecticut and Massachusetts respectively actually does not end “too big to fail.” Banks are restricted in proprietary trading activities and forced to renounce their swaps desks to become separately capitalized operations but the largest part of their derivatives business is left untouched: between 80 and 90 percent of those activities are expected to remain within the banks and the five largest of them—Bank of America, Citigroup, Goldman Sachs, JPMorgan Chase and Morgan Stanley—control over 95 percent of that market, or close to $200 trillion.

In spite of all the rhetoric and the legislative witch hunt which lawmakers persued after they themselves agreed to bail out banks deemed so vital to the US economy that the very notion of their collapse might trigger a panic, they are now set to make those very Wall Street firms wrongly blamed for causing the crisis stronger by imposing capital charges that will make it more difficult for new banks to enter the playing field. In the words of one former Treasury Department official quoted by Newsweek, “they’ve created six new GSEs,” or government-sponsored entities like Fannie Mae and Freddie Mac, also counting Wells Fargo.

Yet those institutions, which were instrumental to inflating the housing bubble, driving down interest rates and played a key role in the Bush Administration’s “compassionate conservative” policy of promoting homeownership, are wholy absent from this new legislation.

The reform bill would erect a new consumer protection regulator within the Federal Reserve—an arrangement Congressman Frank previously described as a “bad joke” but now, apparently, can live with. The agency would be authorized to regulate mortgages, credit card policies and consumer loans with a budget of its own, separate from the congressional appropriations process.

Government will be granted additional powers to regulate Wall Street and break up failing corporations. In order to pay for the new programs, Washington will be allowed to charge fees to large banks and hedge funds to raise up to $19 billion spread over five years. All “large” banks are effectively expected to bear the burden of a fund that is designed to help out one of more of their competitors in the event of a near bankruptcy. If the money hasn’t to be used for that purpose, lawmakers are suggesting that it can pay down part of the national debt.

Democrats have hailed the legislation as a step toward preventing the sort of financial collapse witnessed two years ago. President Obama has urged Congress to deliver the bill for his signature without delay. Republicans almost unanimously oppose it. They warn of unintended consequences and fear that it might crimp financial markets and access to credit.

Dodd reiterated his support for strong consumer protection to shield people from the supposedly predatory lending and credit card policies of big banks which “lure” their customers into borrowing money, knowing that they can’t afford to pay it back.

The responsibility, evidently, rests with business and government in this instance, not with the individual. Aside from the moral implications of his argument, the presumptuousness and paternalism of Senator Dodd was both perfectly clear and perfectly reprehensible on this subject. The purpose of the law is to protect citizens from others; not from themselves, but that is not a view shared by many lawmakers on the left.

Pressed by the moderator on the government’s role in regulating industry and the government’s effectiveness at it, both senators admitted that oversight had failed in anticipation of the 2008 meltdown and subsequent recession. But, said Shelby, “We hope they’ve learned a lot.”

Speaking on the origins of the crisis, Dodd noted that “a lot of the problems occurred in the unregulated part of our economy.” This doesn’t seem right. The trouble began with subprime mortgages to quickly extend into the entire housing market: quite probably the single most regulated sector of the US economy. On top of existing regulation and controls, that sector also had to cope with government sponsored competition in the forms of Fannie Mae and Freddie Mac.

Dodd may have been referring to some of the exotic financial products that turned out to be quite unsavory in the long run but hedge funds and derivatives and the like amounted to only a minor segment of the financial industry. It was bad mortgages that brought down major firms and undermined the stability of the entire system. Those mortgages would not have existed in such quantity had government not for years intervened in the market for the “noble” purpose of stimulating homeownership.

Rest assured though, said Dodd: “We don’t want to so strangle a system that we can’t create jobs, have credit flow and capital form.” The best way to control an economy, after all, is by leaving just enough private business in place to prevent its total collapse.

The Dodd bill won’t kill the financial industry. It even includes some common sense provisions on how to deal with failing banks. Yet on the whole, the morality of financial reform as it is currently being considered is deeply flawed from a free market perspective. Government should not set arbitrary limits on the size of banks. It should not dictate which products and services private enterprises may offer and provide. And it should never set out to protect its citizens against their own shortsightedness and irresponsibility. For such a government-knows-best mentality, in the end, does “strangle” a system: the one called free and civil society.

The Senate Banking Committee has been working on a financial regulatory reform bill for several months now. A new agency is to be established with this bill that has the power to regulate mortgages, credit card policies and consumer loans. Committee Chairman Christopher Dodd of Connecticut anticipated last month that such an agency would be independent, even from the Congressional appropriations process “so it can’t be harmed by lawmakers bent on taking away its power.”

In the wake of Ben Bernanke’s warning last week that, “Stripping the Federal Reserve of supervisory authorities in the light of the recent crisis would be a grave mistake,” a proposal was floated by Senate negotiators to place the consumer protection agency inside the Fed.

Frank wasn’t impressed. “After all the Fed bashing we’ve heard?” he told Politico on Tuesday. “The Fed’s such a weak engine, so let’s give them consumer protection? It’s almost a bad joke.”

Although forty-seven Democratic senators voted to confirm Bernanke for a second term last January, according to Politico, many Democrats are no less skeptical than Frank is.

“I am very leery of any consumer regulator being placed inside the Fed,” said New York Senator Chuck Schumer. “In my twenty years of trying to get the Federal Reserve to properly protect consumers, it has been an uphill, and very often unsuccessful, battle.” Congressman Brad Miller of North Carolina agreed that “there is justified skepticism about giving the authority to the Fed.”

Democratic senator Christopher Dodd of Connecticut listens to testimony on Capitol Hill, Washington DC, November 17, 2009

The upcoming financial regulatory reform bill currently under consideration with the US Senate Banking Committee will probably call for an agency dedicated to protecting consumers from abusive financial practices and products, reports The Huffington Post. Committee chairman Christopher Dodd of Connecticut is expected to release the latest version of the bill later this month.

According to The Huffington Post, the agency will be authorized to regulate mortgages, credit card policies and consumer loans with a budget of its own, separate from the Congressional appropriations process “so it can’t be harmed by lawmakers bent on taking away its power.” In other words: the agency will be able to set its own budget and determine its own policies, with the Senate allowed to confirm candidates nominated by the White House for its executive.

The proposal comes after months of bipartisan negotiations with Dodd and the committee’s ranking Republican, Richard Shelby of Alabama, spearheading the two camps. Where Dodd championed an agency solely tasked to protect consumers, Shelby was anxious about establishing a new institution independent of existing financial oversight.

Last Friday, Dodd admitted that he and Shelby had “reached an impasse” but it would appear that the senior Senator from Connecticut won the argument for, so claims The Huffington Post, “the new organization’s decisions will likely not be subject to vetoes by the regulators in charge of overseeing the health of banks and the financial system as a whole.” That way, it can focus on protecting consumers without having to worry about fellow regulators overruling its decisions for the sake of safeguarding banks.

The danger involved in establishing an array of oversight and protection agencies for different segments of the same market is that each becomes fixated on its own special interest, losing sight of the sector’s interests on the whole—let alone, the economy’s interests on the whole.

There is also a good argument to be made against consumer protection in principle. Such statues elevate the consumer to a status superior to that of the producer for although “consumer protection” applies to everyone, the implication that there exists a separate caste of “consumers” in society opens the door to the creation of a multitude of “protective” agencies, each with varying degrees of independence but all obstructing the workings of the free market—which, of course, is precisely their purpose.

There ought to be no special group rights of any kind; only individual rights which apply equally to all men. All men are protected from injury or fraud, not just “consumers”. If a business willfully injures or cheats men, it is a matter to be proved and punished in a court of law. There is no justice in preventive law which presumes businessmen guilty until proven innocent—especially not when such law is practiced by agencies that can operate almost free of Congressional oversight. Who then protects society against the corruption, cupidity and vindictiveness of its so-called protectors?