The second day of Financial Crisis Inquiry Commission (FCIC) hearings took place today, featuring a lineup of federal and state regulators and attorneys general. Much of the emphasis was on mortgage fraud and predatory lending, as one major factor in the economic crisis was subprime lenders, fueled by Wall Street, who produced a catastrophic decline in mortgage standards.

Now, it stands to reason that regulators would have stepped in and curtailed some of the more pernicious lending practices before they resulted in a full-fledged housing crisis. But the decline in lending standards allowed banks to make a ton of money, and regulators who were primarily tasked with looking out for banks’ bottom lines were loath to step in. As FCIC member Peter Wallison said, “when activities are profitable, it becomes very hard for regulators to stop them.”

Indeed, Attorney General Lisa Madigan (D) explained that she, along with other attorneys general, warned federal regulators about the trouble with the subprime market years before the crisis broke, but that the regulators “had a different agenda”:

I have spoken with people, this would have been 2005, 2006, if memory serves me correctly, about the problems we were seeing, particularly with subprime loans, particularly with no-doc, low-doc loans…The [Office of the Comptroller of the Currency] was well aware, and we did obviously make the OCC aware, that we were looking into not just fair lending practices but other practices of the lenders, in an effort to combat the erosion of underwriting standards. They just had a different agenda.

Watch it:

Federal Deposit Insurance Corp. Chair Sheila Bair confirmed that regulators were hesitant to rein in the banks, saying “it can be very difficult to take away the punch bowl when people are making money at it now.” (And just look at the grief Bair is receiving from the other bank regulators simply for trying to incentivize less-risky Wall Street pay.)

This tale is one more reason to create a Consumer Financial Protection Agency (CFPA) that is tasked solely with protecting consumers from financial abuse and ensuring that financial firms get reined in, especially when it’s predatory practices that are filling their coffers. The CFPA included in the regulatory reform bill that the House passed in December is designed to do just that, but Reuters reported this week that members of the Senate Banking Committee are “talking about reducing the proposed agency’s status, possibly making it instead a division of a new systemic risk regulator or a new super-cop for banks.”

Consumers need their own advocate within the regulatory framework, not a token office within some other agency. The economic crisis proved that the current system is inadequate, and I hope that the Senate (looking at you, Chris Dodd!) remembers that.

Our guest blogger is Brian Katulis, Senior Fellow at the Center for American Progress Action Fund.

The one-year anniversary of President Obama’s inauguration is leading to the usual spate of analyses of Obama’s foreign policy record. Time magazine already had this brief rundown, Helene Cooper at the New York Times looked more prospectively with a focus on the politics of national security, and Foreign Policy magazine’s latest cover suggests similarities between the Obama and Carter administrations.

But one foreign policy issue the Obama administration had to deal with that hasn’t received nearly enough attention is how it led the global response to the international economic crisis.

Nearly a year ago, the Annual Threat Assessment delivered by Director of National Intelligence Dennis Blair put the global economic crisis at the top of the threats facing the country: “The primary near-term security concern of the United States is the global economic crisis and its geopolitical implications.”

The first year analyses on Obama’s foreign policy have focused primarily on traditional security concerns and largely ignored the diplomacy tied to the unprecedented economic interventions that were globally coordinated in 2009 — what amounted to the quickest and largest governmental response to the worst economic crisis since the Great Depression. This wasn’t a repeat of previous international crises like the Asian financial crisis in 1998; the problem was more widespread and interlinked, and responding to the crisis took up a lot of time and attention.

The mix of coordinated fiscal and monetary policy moves throughout 2009 haven’t made everything better at home or abroad — Americans are still hurting with unemployment hovering around 10 percent, and many of the gains in the fight against global poverty made in recent years were lost during the global economic crisis of 2008-2009.

But it could have been much worse had the United States not led through forums like the G-20 meetings in London in April and Pittsburgh in September, and through the quiet diplomatic and economic coordination efforts. For example, the Obama administration has led bilateral efforts like the US-China Strategic and Economic Dialogue and coordinated economic support to critical countries like Pakistan, which narrowly escaped a liquidity crisis.

The shift in tone from the Bush administration towards one of greater engagement and international partnership, exemplified by decisions on missile defense and Afghanistan, were important markers in foreign policy –- but we can’t forget that dealing with the economic mess left behind by the Bush administration topped the agenda at home and abroad.

Today, the White House formally announced its proposal to implement a fee on banks, aimed at recouping money lost on the Troubled Asset Relief Program (TARP). The fee will be assessed on financial institutions with more than $50 billion in assets, and will amount to $1.5 million for every $1 billion in assets, excluding deposits (which already come with an FDIC fee). The fee will be in place for ten years, or longer if the cost of TARP has not been fully recouped after that period.

The banking lobby, of course, has already come out strongly against the proposal. Yesterday, JP Morgan Chase CEO Jamie Dimon also chimed in, saying that the fee is meant to “punish people,” which is a “bad idea.” And now House Republicans have gone to bat for the big banks, claiming that implementing a bank fee would be “lunacy”:

Rep. Scott Garrett (R-NJ) “has said any tax or fee could hinder the economic recovery and further limit the industry’s ability to extend more loans.”

Rep. Jeb Hensarling (R-TX): “How you are going to tax banks and expect them to lend more is frankly lunacy.”

Rep. Spencer Bachus (R-AL): “The tax will only drain capital from the financial system at a time when it’s needed to create jobs and fuel economic growth.”

Rep. David Camp (R-MI) said “while he and other Republicans find bonuses being paid by banks that got bailouts ‘irresponsible’ and ‘outrageous,’ they are concerned that taxing banks will hurt lending, and thus job creation.

When Obama tried to encourage banks to make more loans, Republicans criticized him for doing “the exact same thing that caused the [financial] problem.” Now that Obama wants to implement a fee on the biggest banks, though, lending is paramount!

On a more important note, all of the whining is futile, as the TARP law requires the administration to create a fee in order to recoup any of the program’s losses. The law states that some sort of revenue-raising mechanism needs to be in place by 2013, but the administration said that “the President has no intention of waiting that long.”

Like Felix Salmon, I think this fee is structured correctly. “It’s simple, and the liabilities-minus-deposits formula naturally puts more of the onus on investment banks than commercial banks. It also encourages banks to fund themselves with equity rather than debt,” he wrote. Also, the threat of lending being cut or fees being passed on to consumers seems to me to be overblown. Marginal cuts in lending over the long-term may not be the worst thing, as exceedingly easy credit was one contributor to the economic crisis, and if the banks try to pass on the cost of the new fee, that simply gives other, smaller banks an opportunity to keep their prices stable and grab some market share.

It remains to be seen how this is going to square with the fee included in the House’s regulatory reform bill, which raises money to build up a fund for dissolving failed firms without risking taxpayer money. But if, like every other regulatory reform effort, this one meets with blanket Republican opposition, the new fee will serve the administration’s purposes, both economically and politically.