On Thursday, the Senate passed a 2,300+ page financial reform bill 60-39. As Politico reports, the legislation that the president will sign in the next few days, establishes a new consumer financial protection bureau, caps the fees debit-card companies can charge merchants, allows the government to break apart failing financial firms and mandates transparency of the derivatives market.

But while lawmakers included just about everything under the sun in the bill, they failed to deal with the root causes of the financial crisis. As Mark Calabria over at Cato explains today:

“In choosing to ignore the actual causes of the financial crisis — loose monetary policy, Fannie/Freddie, and never-ending efforts to expand homeownership — and instead further expanding government guarantees behind financial risk-taking, Congress is eliminating whatever market discipline might have been left in the banking industry.” 

When it comes to the two government-sponsored entities, Fannie Mae and Freddie Mac, Congress has truly failed.  It has been known for years that Congress has essentially given these GSEs free reign to operate in an irresponsible manner. They often functioned without sufficient capital, took on more risk than private financial institutions could manage, and borrowed at below-market interest rates. 

As AEI’s Peter Wallison recently wrote in the Wall Street Journal:

“The most disturbing element of both Obama Care and the financial regulatory legislation now before the Senate is that they set up, in different ways, a partnership between the government and the largest companies in a particular industry.

In ObamaCare, the private insurers and pharmaceutical manufacturers have become, through regulation, both a tool of the government and perennial seekers of both more government support and more government leniency–hence the Nevada ad; while in the financial legislation the largest nonbank financial institutions will be both protected by the government and controlled through Federal Reserve regulation and the threat of a break-up.

It’s vital to recognize the pattern: The Obama administration is gradually changing the nature of our economy and society by putting government at the center.”

In the end, this is a bill that supports the very banks it was supposed to be “regulating,” at the expense of  small banks and small businesses. It’s clear the federal government is a leading culprit in much of the reckless banking behavior. But I guess it would take quite a bit of soul searching to really address that problem.