Yielding to Reform

The rules of the road for Wall Street had to change after the car wreck that left the economy in critical condition.

But the shape of reform matters as much to the innocent bystanders — the nation's middle class — as it does to the masters of the universe in lower Manhattan who drove financial markets into a ditch.

"It's about middle-class people having a fair shot," said Vice President Joe Biden, during a stop at the University of Wisconsin-Milwaukee on Tuesday. Biden and Treasury Secretary Timothy Geithner are touring the country to drum up support for financial reform legislation Senate Democrats hope to pass.

Biden is right about the need for reform, and we agree that the legislation about to come before the Senate, while not perfect, would add a few new guardrails and take a few curves out of the road. Good things.

"When financial markets function well, they allocate resources appropriately, which creates jobs and builds the middle class," Biden said. But in recent years, as the big banks "diverted capital into their own private casinos" and lost it, taxpayers had to ante up, he noted.

For the middle class, it was a disaster. Even as productivity grew, income remained flat. Even as the stock market soared, job creation hit its lowest point since the late 1940s.

The bankers, Biden said, "basically were betting against the American people. And when they won, everyone else lost."

The bill before the Senate would:

— Protect consumers against abusive and unfair practices.

— Create tough new rules that require transparent trading of derivatives. (Shadowy trading of derivatives helped deepen the crisis in late 2008.)

— Require that banks have adequate capital reserves.

— Break up big interconnected banks if they fail, wiping out their shareholders and parceling out their assets.

"You want to make sure you can contain the fire — to make sure it doesn't jump the fire break," Geithner said.

The bill would rein in the worst Wall Street excesses and protect consumers but still give financial services companies the wiggle room to innovate.

We quibble on a couple of points. We think forcing big banks to withdraw from the derivatives market is overkill but also insist on transparency here. And we agree with critics that Congress still must deal with the excesses at mortgage giants Fannie Mae and Freddie Mac, which remain government wards.

But the bill does create new rules of the road that circumscribe activities and spell out the consequences for failure. Does it make taxpayer bailouts impossible? No. No bill can do that. But it does make them far less likely.

REPRINTED FROM THE MILWAUKEE JOURNAL SENTINEL.

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