The Wild, Off the Mark Arguments Against the Volcker Rule

Big banks are formulating a host of arguments -- wild, off the mark arguments -- aimed at dismantling the Volcker Rule firewall between loan-making, customer-serving banks and high-risk hedge funds.

That firewall is essential for a stable banking system. When hedge funds blow up, and they regularly do, one doesn't want them taking out our loan-making system that is so vital to our families and businesses.

MF Global, for example, blew up just a few months ago due to big bets on currency markets. But those bad bets didn't damage our banking system, because MF Global wasn't part of a bank.

So why do big banks want to tear down the Volcker firewall? Quite simply, hedge funds and similar trading buried in legitimate risk hedging and market-making are big business and, often, make big profits. Moreover, hedge funds inside banks have a competitive advantage by benefiting from government subsidies in the form of insured deposits and access to the Federal Reserve discount window.

So what are the arguments the banks are making to attack the Volcker firewall? First they argue that the Volcker firewall will hurt retired teachers and cops by decreasing "liquidity" in markets, which is how easy or hard it is to buy or sell securities. They argue that any decrease in bank trading will make it harder for investors to buy or sell stocks and bonds, which they assert will increase the amount that investors will have to pay for transactions, thereby decreasing the profits for pension funds of retired teachers and cops.

Wrong. First, the Volcker rule explicitly allows for "market-making" by bank brokers. Banks will continue to be able to serve investors by helping them make trades. Second, if additional trading is truly profitable without the support of the discount window and FDIC-insured deposits, such trading will take place outside of banks as it has for decades. Third, "liquidity" is not a holy grail. Being able to trade ever faster is not always an economic gain, either for investors or for the economy. High speed trading and computerized trading don't add much to the economy, and they can do massive damage when things go awry.

For these and other reasons, pension funds such as CalPERS, the nation's biggest, support the Volcker Rule because they depend on a stable financial system free from boom and bust cycles. Moreover, they benefit by reducing the conflicts of interest that derives from massive hedge fund trading by multi-trillion dollar banking institutions.

A second major line of attack that the banks have opened up on the Volcker firewall is it will raise gas prices even further. They even have a fancy study for their conclusion, financed by Morgan Stanley, where they argue that if a bank cannot make massive bets on the price of oil, then the price of gasoline will go up and 180,000 jobs will be lost.

Wrong. The evidence points in the opposite direction. When big banks invest huge sums on the belief that oil markets are going up, it creates an artificial surge in demand that raises the price of oil. A recent Goldman Sachs report estimated that oil speculation increases the price of gasoline by about 56 cents per gallon. Even the chairman of Exxon-Mobil estimated that the true price of a barrel of oil based on supply and demand should be in the $60-70 range at the same time prices were over $100.

A strong Volcker firewall, by getting the banks out of the commodities trading market, will reduce excessive speculation, creating a pathway to more stable prices.

As Chairman Volcker has emphasized, U.S. markets worked well for 60 years under a much tougher Glass-Steagall separation of commercial banking from investment banking, including strong limits on bank participation in commodities. Similarly, the markets will work very well under the Volcker Rule's modernized firewall.

The big banks aren't paying for phony studies, and shielding themselves behind teachers, cops, and drivers because they want to actually lower prices for anyone. Rather, they are doing it because the Volcker firewall will force them to give up the hedge fund-like trading that makes them billions of dollars in profits in good times, but billions of dollars in losses when things go south.

When hedge fund trading blows up the banks, it will deeply damage loan-making for families and business across America, causing deep economic destruction. In short, and to paraphrase Warren Buffet's comments, hedge funds inside banks are instruments of mass financial destruction.

The sooner the Volcker firewall is implemented, the better for all of us.

 

Follow Sen. Jeff Merkley on Twitter: www.twitter.com/SenJeffMerkley

Comments

[LMPE]

10:11 PM on 04/08/2012

More proof that the right wing exists in its own reality.

Thank god we elected you and got rid of Gordon Smith!

[Jel Mar]

03:57 PM on 04/09/2012

Sooooo...there is no such thing as Left Wing Hedge Fund Manager? Does Goldman, Morgan and Citi only employ right wingers?
I'm often curious as to why some people think greed and corruption is contained to one ideology.

[Genders]

08:08 PM on 04/08/2012

Are we forgetting?

Are we getting used to being owned by the very banksters who crashed the economy?

The Banksters Robbed us of trillions. The federal Reserve has given them , at .004%, about 16 trillion more, plus 10T$ to foreign banksters. That becomes 260T$ with fractional reserve, that more than the value of the world businesses. Arrest the Banksters for the Fraud: SWAPS and CDO's. Federal reserve system.

Watch "the Money Masters"
http://www.themoneymasters.com/
http://webskeptic.wikidot.com/money-masters-transcripts-part-24
Bankster now literally own us.
http://en.wikipedia.org/wiki/File:Estimated_ownership_of_treasury_securities_by_year.gif

Phase out fractional reserve while issuing greenbacks. That creates a debt free monetary system

“The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity.” Abraham Lincoln

Finance went from 5% of our economy in 1980 to over 144% when it crashed, made up for with OUR FED 26T$ for free .004%.

http://en.wikipedia.org/wiki/Financialization#Financial_turnover_compared_to_gross_domestic_product

[waltifarian]

03:32 PM on 04/08/2012

They should give up their Bank Holding Company licenses, and thus taxpayer protections -- and compete away in the wonderous free market they claim to believe in. Oh, but competition is something in truth that lip service *only* is paid to. These guys want to no competition -- and they want consumers to have no choices or alternatives to their services. In short, they seek, and have largely managed to obtain, taxpayer insured mono-/duopolies and cartels.

[LeftsideRebelYell]

01:17 PM on 04/08/2012

If the banksters are against it it is a good rule.

[jessjesskk]

10:21 AM on 04/08/2012

I think the benefits of the Volcker rule are way overstated. That said, it is probably a good thing that overall should improve efficiency of the markets and thus should be implemented.

[T-Haight]

09:45 AM on 04/08/2012

The biggest problem with the Volker rule is that nobody can describe what it is in writing. Sure, "you can't use customer funds for proprietary trading" sounds great, but the draft rule was hundreds and hundreds of pages, because defining proprietary trading and customer funds is much harder than it sounds in a 15 second sound bite. If the rule is that hard to write down, it won't be a good rule because it will be hard to implement, hard to police, and it likely missed something.

P.S. - MF Global has nothing to do with a Volker rule. They broke existing rules - not the Volker rule - and lost a lot of customer money covering Jon Corzine's bad bets on European sovereign debt.

[LeftsideRebelYell]

01:18 PM on 04/08/2012

Change that PS to BS.

[Not Rick Johnson]

09:32 PM on 04/08/2012

genuinely curious - change to B.S. about banks in general or about the poster's contention that MF Global had nothing to do with a Volker rule ?

[waltifarian]

03:24 PM on 04/08/2012

And we can thank lobbyists for that.

[alafonse]

08:46 AM on 04/08/2012

Our banking system wants unbridled capitalism. Well, surprise—that's what got us in the pickle we're in now.
I don't care how they do it, but these guys need to be controlled. The love of money truly is the root of all evil, and people have demonstrated time and time again that they have no morals or ethics where money is concerned. Ergo, they need strong definitive rules that will keep them in line.

[lightnessandjoy]

09:10 PM on 04/08/2012

Our banking system doesn't want unbridled capitalism; it wants government-insured, taxpayer-financed market speculation. The last thing they want is risk. They want corporate socialism.

[HamletsMill]

08:06 AM on 04/08/2012

Very thoughtful article, Senator Merkley. Much appreciated. But you are 12 years too late in your analysis. The damage has been done and the power of the bankers is absolute over the Government of the United States. We are ultimately going to mind bending catastrophe like we did in 1929.

Our problems stem from an unholy confluence of both a massive "concentration of wealth" and a massive "concentration of economic ignorance".

People must first understand the banking system and how it works. They have to understand the origin of the concept of "The Corporation" itself and start to connect the dots. Then they have to start to understand the sordid financial pre-history/history of the United States in 1694, 1776, 1781,1811,1836,1860,1863,1873,1895,1907,1913,1929,1936,1945,1987,1999, and 2008. Our immediate fate is all there unless people become educated.

GEORGE CARLIN - "WHO REALLY CONTROLS AMERICA"
http://www.youtube.com/watch?v=hYIC0eZYEtI

THE SECRET OF OZ - Bill Still
http://www.youtube.com/watch?v=swkq2E8mswI

LIFE INC. - Douglas Rushkoff
http://www.youtube.com/watch?v=sOBWhVe68os

WEB OF DEBT - Ellen Brown (1 of 5)
http://www.youtube.com/watch?v=QU0XiklHPMc

A SHORT HISTORY OF THE "MONEY POWER"
http://www.monetary.org/wp-content/uploads/2011/10/32-page-brochure-sept2011.pdf

All people have to know about "unregulated capitalism" and their own potential fate is that the Founder of General Motors, William C. Durant, was completely wiped out in the Crash of 1929 and died nearly destitute managing a small bowling alley in Flint, MI.

[PeterBright]

09:03 AM on 04/05/2012

Paul Volcker has repeatedly been the voice of reason in the volatile world of finance and banking.

The greed factor group that over took banking, Wall Street, etc.., wants no limits.

We must listen to, and act on, Volcker's advice.
Peter Bright

[Jerry Bozeman]

06:31 AM on 04/05/2012

Add to it a token tax on financial transactions to dampen trading and you've got a winner.

[Josh Crawford]

11:19 PM on 04/04/2012

If the "Big Banks" are against it, I'm guessing the rest of us should be for it!

[Bayard Waterbury]

06:34 PM on 04/04/2012

Jeff, how refreshing to find a Senator being critical of the big campaign supporters (the financial oligarchs) who are totally against any restraint on their greed. They place former employees in critical agencies, which they try to underfund or defund. They employ at least 10 lobbyists on K Street for every elected member of Congress. They spend endless dollars on "think tanks" which support their causes, employ fleets of high powered law firms to settle cases based upon their endlessly greedy actions. They refuse to make any part of the CDS markets transparent, and now have built these global markets to nearly a quadrillion dollars and their actions continue to push the commodities prices, oil and others, to sky high prices owing to their endless speculation. As the SEC tries to define the Vollker Rule, they just lobbied to make the "JOBS" legislation so that they can now tell outright lies about the investment opportunities that they represent, returning to the deeply rooted cheating practices that burst the last bubble. Time to apply the brakes and send many of them to jail.

[ftkl1234]

05:41 PM on 04/04/2012

We're now hearing there are smart regs and not so good ones that do hamper creativity and business growth. But the opponents of the Volker Rule seem to ignore and dismiss that getting rid of regs is what brought about the economic catastrophe we now are mired in. They never quit trying, do they?

[pargi1944]

02:17 PM on 04/04/2012

Of course the banks will squeal like stuck pigs. We need a little sunshine into their shady dealings. The Volker Rule is something that has been needed for years. But the banks don't want their betting parlors open to view. There is still much more oversight needed, hopefully as the bank's squadrons of high priced attorneys and accountants search under rocks for all the little holes, they can be plugged up.

[Claudia King]

01:23 PM on 04/04/2012

Thank you, Sen. Merkley! You left the nonprofit, Human Solutions, Inc., not long before I arrived as a department director more than a decade ago. I watched your work in OR and, now from WA State, continue to watch and applaud your stances on a host of issues.