The fix is in. Democrats are planning to remove Blanche Lincoln’s provision on derivatives after her primary on Tuesday, killing a crucial aspect of financial reform. Robert Reich calls this provision the "biggest battle of bank reform" and for good reason.

Before the crisis, Warren Buffett described derivatives as "financial weapons of mass destruction" that pose a "mega-catastrophic risk" not just for the firms involved but for the entire economy.

The fight is about whether to allow firms trading derivatives to continue to have their assets insured by the Fed. Under Lincoln’s proposal banks would have to spin off their derivatives business. The traditional commercial banking business could then be insured by taxpayers while the more risky and complicated derivatives business would fend for itself.

There are two sides to this battle. On one side are Barack Obama, Ben Bernanke, Republican FDIC Chief Sheila Bair, former Fed Chairman Paul Volcker, and of course the banks and most Republicans. On the other side are Joseph Stiglitz, former Secretary of Labor Robert Reich, NYU economist Nouriel Roubini, and Americans for Financial Reform, which includes the AFL-CIO and the Center for Economic and Policy Research (CEPR).

What I find truly amazing about all this is how it exposes the bankers lobbying Congress for being shameless pigs feeding from the trough of government subsidies. Here’s Section 716, the Lincoln provision:

SEC. 716. PROHIBITION AGAINST FEDERAL GOVERNMENT BAILOUTS OF SWAPS ENTITIES.
(a) PROHIBITION ON FEDERAL ASSISTANCE.—Notwithstanding any other provision of law (including regulations), no Federal assistance may be provided to any swaps entity with respect to any swap, security-based swap, or other activity of the swaps entity.

The bankers are saying, "Prohibiting government bailouts of our riskiest investments? No way!" Of course, federal insurance of bank deposits are nothing new, but it’s a privilege banks enjoy because it’s in the national interest. Now when we try to revoke that privilege for banks making especially risky investments, they throw a complete tantrum.

Shameful!

I’ve read the arguments I can find from both sides on this issue and the side supporting the Lincoln provision is much more convincing. Their case is far more detailed and they rebut all the points of their opponents. The death of AIG was caused by derivatives and if we haven’t learned from that fiasco by now then hope is very, very slim.

Besides, given the people on each side, who would you trust?

The media reaction to this has made me really, really angry, though. The media and the business press has completely cut out one side of the debate. Look at this Business Week article that doesn’t mention one person except Lincoln who supports the provision, making it look like she just pulled it out of her ass. Even in The Atlantic you read:

Who’s against this proposal? Opponents include the White House, FDIC Chairwoman Sheila Bair, Federal Reserve Chair Ben Bernanke, Former Fed Chair and financial reform advocate Paul Volcker, Senate Banking Committee Chairman Christopher Dodd, most (if not all) Republicans. In other words, virtually every significant Washington economic policymaker outside of Congress plus Republicans.

True enough, but former policymakers who are actually progressive, unlike these blokes, are in favor.

Ezra Klein repeated the same bullshit:

That isn’t to say that no one supports the idea: Michael Greenberger, who was Brooksley Born’s lieutenant when she tried to look at regulating the derivatives market in the ’90s, thinks the idea makes sense. So do some others. But in general, reactions have been negative, even from the people who would like to support strong derivatives-legislation. But some of these critiques are remaining quiet because, first, some people think this is a useful place to concentrate fire so that the important derivatives-regulations emerge unscathed, and second, because the politics of being tough on derivatives are pretty good right now, and third, because people feel that Lincoln has unexpectedly come to the rescue of the derivatives-regulation cause and no one wants to alienate such an unexpected and useful ally.

Ok, he wrote this before Stiglitz, Roubini and Reich came out with their critiques. You’d think maybe it was just a case of bad timing. But it wasn’t: he was still ignoring them as of yesterday.

I’ve had it up to here with slick-sounding narratives that turn out to be built on a dung heap.