Majority Leader Harry Reid (D-NV) failed to end debate on Sen. Chris Dodd’s (D-CT) financial regulation bill yesterday when two Democrats broke ranks to vote with conservatives. The Dodd bill is already a big government monstrosity, expanding powers for existing Washington regulators as well as creating and empowering new ones. But frightened by the defeat of Sen. Arlen Specter (D-PA) and the near defeat of Sen. Blanche Lincoln (D-AR), Sens. Maria Cantwell (D-WA) and Russ Feingold (D-WI) issued statements following their “no” voted demanding that the bill further increase the power of Washington bureaucrats.

Specifically, Cantwell wants to criminalize violations of the bill’s extremely complex new derivatives provisions, and Feingold is demanding the resurrection of Depression Era prohibitions on banking diversification. Not only has our federal government already criminalized the violation of far too many  arcane regulations, but the derivatives provisions already in the bill are sure to drive investment, jobs and revenues out of our domestic markets and into foreign ones. And Feingold’s claims that restoration of the Glass-Steagall would prevent “too big to fail” bear no relation to reality. None of the major entities at the core of the 2008 financial crisis would have been affected by Glass-Steagall Act because none of them are commercial banks. Bear Stearns, Merrill Lynch, Lehman Brothers, AIG, Fannie Mae and Freddie Mac all dug their financial crisis graves by making terrible decisions that would have been perfectly legal under a Glass-Steagall regime.

Speaking of Fannie and Freddie, there is still nothing in this bill that addresses the perverse incentives and moral hazard that is created when the federal government sticks its nose into the housing market. Last year, the two financed or backed about 70% of single-family mortgage loans. They hold about $5 trillion in their investment portfolios. Both are losing money fast, with those losses being covered by the U.S. taxpayer. Last month, Freddie announced it had lost $8 billion in the first quarter of 2010 and would be asking for another $10.6 billion in taxpayer help. Not to be outdone, Fannie announced an $11.5 billion loss and asked for another $8.4 billion from taxpayers. That’s atop the nearly $145 billion of your dollars that Fannie and Freddie have already received. Fannie and Freddie alone prove this bill does nothing to end “too big to fail.” Fannie and Freddie should be partly wound down, the rest broken up and sold off — not replaced, reformed, or rejuvenated. The Dodd bill does none of that.

This bill extends the power of Washington at the expense of Economic Freedom in other ways too. It creates a permanent new bailout authority that undermines our bankruptcy system and the rule of law. And the new Bureau of Consumer Financial Protection is empowered to regulate the financial transactions of virtually any business including motorcycle manufacturers, retailers, car dealers and even coffee shops.

On Sunday, columnist Ross Douthat described the Dodd bill as just one example of “the real story of our time. From Washington to Athens, the economic crisis is producing consolidation rather than revolution, the entrenchment of authority rather than its diffusion, and the concentration of power in the hands of the same elite that presided over the disasters in the first place. … If Robert Rubin’s mistakes helped create an out-of-control financial sector, then naturally you need Timothy Geithner and Lawrence Summers — Rubin’s protégés — to set things right. … But their fixes tend to make the system even more complex and centralized, and more vulnerable to the next national-security surprise, the next natural disaster, the next economic crisis. Which is why, despite all the populist backlash and all the promises from Washington, this isn’t the end of the ‘too big to fail’ era. It’s the beginning.”

Quick Hits: