GOP maintains traditional principles in uphill battle on financial regulation

House Republicans are returning to a familiar playbook of small government and less regulation as they stake their position in the battle to overhaul the financial system.

Most of their proposal, officially outlined on Thursday, reiterates traditional Republican stances on business and faces a slim chance of becoming law in Democrat-controlled Washington. It also has little chance of winning over the public, which favors additional regulations.

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The party is sticking with its attack on government bailouts, but its argument on regulation appeals to the party base. Much of what it is calling for represents less new regulation — a contrast to its traditional allies in the financial community, who have urged greater oversight since last year.

“We don’t believe that the government should be picking winners and losers, and we want to see market forces return under certain but limited rules so that innovation can occur again,” said House Minority Whip Eric Cantor (R-Va.).

Rep. Scott Garrett (N.J.), a leading Republican on the House Financial Services Committee, argues that Democrats have done an “outstanding” job of framing their case about the causes of the financial crisis.

“I do believe that — give credit where credit is due — that Democrats did an admirable job early on of demonizing Wall Street and demonizing the free market and the president has made it his mantra that capitalism is bad,” Garrett said in an interview with The Hill.

He said that Republicans intend to introduce their plan either as a full bill or broken up by issues, depending on how Democrats decide to proceed.

A Washington Post/ABC News poll in late February found that roughly three-quarters of Americans support stricter federal regulations on banks. A Pew Research Center poll in May found that more than 60 percent of the public supports government regulation of business overall.

But the Republican plan may win over the party’s shrinking base.

The Pew poll shows a yawning gap between the two parties on the need for business regulation. Republicans increasingly view regulation as harmful, while Democrats are moving in the opposite direction. Between 2007 and 2009, the percentage of Republicans viewing regulation as injurious to business increased by 18 points. By contrast, Democrats during the same period viewed regulation as less of a problem by a nearly equal measure, 16 points.

Striking the balance between more regulation and effective regulation is at the center of the debate. The Obama administration is set to unveil its proposal on June 17 and is expected to include several new proposals and a greater role for the government to oversee “systemic risk,” to wind down non-bank financial institutions that fail and beef up consumer and investor protections.

The public, said Carroll Doherty, associate director of the Pew Research Center for the People and the Press, is of “two minds” when it comes to regulation. “They want the government to do more in regulation,” he said, “but they also see the downside.”

The Financial Services Roundtable, a trade association that represents 100 large industry interests, is calling for broad changes to the industry. “It’s a 2009 issue,” Steve Bartlett, the association’s head, told reporters on Thursday. “We think the regulatory structure was in fact a large part of the problem.”

Garrett said that the industry continues to struggle with a way to define some of the key issues in the debate. “When you meet with them privately, they say, ‘We don’t know what a systemic risk is,’ ” he said.

The Republican plan opposes future government bailouts, calls for a consolidation of government agencies and favors market discipline.

Among the key elements:

• House Republicans are opposed to setting up a new “resolution authority” to wind down non-bank financial institutions. Instead, they support the use of the bankruptcy code.

• They are opposed to granting the Federal Reserve authority to monitor systemic risks that could severely hurt the economy. Moreover, Republicans would remove supervisory authorities from the central bank and have it simply set monetary policy.

• Republicans argue that Fannie Mae and Freddie Mac, the government-sponsored enterprises that required massive government bailouts, need to be fundamentally restructured.

On a couple issues they may see some overlap with congressional Democrats. Republicans are calling for a merger of the Office of Thrift Supervision and the Office of the Comptroller of the Currency, two agencies under the Treasury Department. They are also seeking a way to promote competition among credit rating agencies.