There’s more going on in Washington this week than health care reform. Giving up on efforts to get a bipartisan deal on financial regulation, Senate Financial Services Committee chair Chris Dodd today released his own plan – sans GOP support – for “fixing” the financial system. The goal, according to the plan, is to create a financial system that will not only prevent another financial crisis, but one that “works for and protects” Americans. It’s a fine sentiment, but there’s one problem: the new regulations being proposed will make the financial system worse, not better. And while claiming to make financial bailouts a thing of the past, it would actually make them more likely, in effect creating a permanent TARP program.

Among the key provisions of Dodd’s plan:

1. A new Consumer Financial Protection Bureau, to be located within the Federal Reserve Board bureaucracy. While not technically independent, the new agency would be largely autonomous, virtually guaranteeing conflict with other regulators focused on the safety and soundness of financial markets. Moreover, the new agency would do little to actually help consumers, instead limiting their options and increasing their costs.

2. A new $50 billion fund that is to be used in “emergencies” to settle the affairs of failing financial institutions. This fund is virtually certain to be used for bailing out politically significant financial institutions, and is nothing less than a permanent TARP program. And, although Dodd argues that this fund will be financed by fees on financial firms, not taxpayers, the real cost will doubtless be passed on to American consumers.

3. A powerful Financial Stability Oversight Council, made up of nine existing agencies, with power to “draft” financial institutions into a regulatory structure, and then to order any financial institution to break itself up, stop selling certain products, or even to go out of business. The bill would give the new regulator almost unlimited power, and is likely to stifle innovations and increase costs for consumers.

This is the wrong approach to fixing our financial markets. Bigger government and pre-funded bailouts will not fix the system. Instead, the focus should be on establishing an effective bankruptcy system for large financial firms to allow failures to be addressed in the same way failure is addressed in other industries. Congress should go back to the drawing board to get this right.

Co-authored by David John.