Blowback on Wall Street from Scott Brown's election in Massachusetts

A problem with blowback is you can't be sure what it will hit. Scott Brown's election as the senator from Massachusetts to replace Ted Kennedy was blowback from the Obama administration's inattentiveness to the independent voters who put it in office. But that election led the administration to cater to those same independents by shifting focus away from health insurance reform and back toward Wall Street.

The big money lobbyists almost pulled it off. A quiet, but determined lobbying effort in the second half of 2009 had persuaded the administration and Congress to slide financial regulatory reform toward the back burner. Most Democratic political capital was committed to reforming health insurance. The Republicans, realizing that the Dems were tied up with Washington problems, set an ambush in Massachusetts. Just as inattentive deer don't survive the time in the fall when a lot of people wearing blaze orange enter the woods, Martha Coakley and the Dems paid the price for not staying alert.

Then, Barack Obama demonstrated why he was elected President. Two days after the debacle, the President announced a proposal to place new restrictions on the activities of big banks designed to prevent them from using federally insured deposits or loans from the Federal Reserve to engage in risky and speculative activities. Remember that last week, the administration proposed a tax that would fall primarily on big banks' short term borrowings (excluding customer deposits), thus discouraging them from using fast money leverage. Taking these two initiatives together, big banks will have powerful incentives to formally split their depositary and investment banking operations. Add the extensive regulation of bank holding companies that exists and the increased holding company regulation that may well be on the way, and you have a regulatory mix that would encourage a complete corporate breakup between depositary banks offering federally insured deposits and the Masters of the Universe who do the wild and woolly stuff.

Yesterday, the political theater was vivid, with Paul Volcker standing next to the President as he announced the proposal to revive, sub silentio, the Glass-Steagel Act. Volcker, a former Chairman of the Federal Reserve and an unyielding proponent of increased prudential regulation for banking, is widely reported to have been in the Democrats' gulag for the past year. It seems that Scott Brown unintentionally got Volcker sprung, and along with him serious intent to crack down on Wall Street.

That wasn't quite what the Republican agents provocateurs assisting Brown intended, either. But they placed their chips on the outrage of independents. Those who live by populist ire die by populist ire. Wall Street stands shoulder to shoulder with the federal government as a target of independents. The President and his aides know this, and they have turned their agenda on a dime to steer the pitchforks toward the big banks. If the Republicans use their 41-vote minority in the Senate to block the new, improved financial regulatory reform proposal, they will find themselves on the wrong side of pickup truck-driving insurgents. It's very unpleasant to be hit by a pickup truck.