Few things better demonstrate the ludicrous futility of the Senate’s deficit hysteria than Sen. Blanche Lincoln’s (D-AR) and John Kyl’s (R-AZ) long fight to cut the estate tax

It’s summer in an election year, and that’s the time for the deficit peacocks to come out of hibernation and strut their feathers, letting everyone know that they care – very much! – about deficits. This is a bipartisan phenomenon. On one side of the aisle, Republicans want to freeze discretionary spending, borrowing an idea from the other side of the aisle, from Claire McCaskill (D-MO). She at least tried to sound reasonably sane, but the impact of her preferred policy would be pretty negative.

An odyssey that started back in December in the House could finally culminate today, with the finishing touches put on the Wall Street reform bill as the conference committee winds up its work. With so many consequential issues still yet to be fully decided, it’s hard to know how to judge that finished product.

In a statement, Lincoln’s spokeswoman said she wanted to make sure “no Arkansas bank—no matter its owner—is punished”. Why does raising capital requirements constitute punishment? Aren’t Arkansas families punished when leverage goes up and risk enters the system and banks fail, rippling through the economy and causing the kind of deep recession we saw in the 2008 period? Lincoln’s claim that she just wants to protect local banks that didn’t destroy the economy – ridiculous on its face, because the market for riskier securities could easily flow down to banks with looser regulatory requirements – doesn’t match her actions.

A lot has been said and I’m sure a lot more will be said on the primary challenge Bill Halter mounted against Blanche Lincoln in Arkansas, a primary challenge I was glad to help work on. In the lessons learned category, I recommend Jane’s post, which goes through a history of intentional primary challenges we often forget and gives an overview of what outside groups can learn when engaging in these tactics.

In trying to identify exactly what went on in Arkansas I’ve been taking a close look at the numbers and I’ve come to a few conclusions. I’ll lay out the full set of numbers here as well so folks can draw their own.

Community banks (with assets all the way up to $50 billion dollars) could conceivably create a trading operation of their own, collect subsidies through the discount window and FDIC depositor insurance, and still engage in risky, speculative activity connected to all sorts of positions across Wall Street and the world. Hundreds of community banks of this size already engage in swaps trading. As a result, you could see the mega-banks either retain some of their business in well-capitalized subsidiaries, but the rest of it shift to somewhat smaller regional entities. If they aren’t properly capitalized, that could end up being just as bad a problem and foster more consolidation in the industry, without reducing risk.

Despite earlier reports of a new day for the embattled Section 716 provision of the Wall Street reform bill, which would force mega-banks to spin off their swaps trading operations, a compromise appears in the works. Blanche Lincoln has a lot to think about here. She supposedly won her Democratic primary on the strength of committing to “tough” new rules on Wall Street. A compromise like this would damage that argument significantly. It’s her move.

Ryan Grim and Sam Stein have an excellent piece on the coordinated efforts of various groups to support Bill Halter’s challenge to Blanche Lincoln. It represents the evolution of the efforts behind the Ned Lamont and Donna Edwards races, and now that the election is over, deserves some discussion.

Senator Robert Menendez, leader of the Democratic Senatorial Campaign Committee, sent out a memo deriding labor unions who supported Bill Halter as “special interests in Washington.” The DSCC’s website also featured an article slamming labor unions for supporting Halter.

It takes some gall for the Senator who literally represents Wall Street to not just congratulate Blanche Lincoln for “fighting Wall Street” with her sham derivatives bill, but to in the same breath congratulate her on “fighting unions.”