Paul Volcker deserves better. In the hands of Tim Geithner's Treasury, the Rule named for Volcker supposedly limiting speculative mischief by government-guaranteed banks is fast becoming a cumbersome parody of itself.
Financial regulatory officials, at the behest of Wall Street, have turned a simple bright line into a convoluted monstrosity. The questionnaire alone, inviting comments, runs 530 pages.
The bankers and their allies in government have succeeded once again in making their financial engineering too complex to regulate. The Volcker Rule, in the spirit of the 1933 Glass-Steagall Act, was supposed to simplify matters. But the regulators are helping Wall Street by adding to the complexity. See Jesse Eisenger's analysis from Propublica.
The capacity of Wall Street to create new mutations of derivatives that are not quite explicitly covered by this or that sub-sub-sub rule is of course endless. In the absence of a clear line, Wall Street can always field more lawyers than the government can spare regulators, and what an awful waste of taxpayer money.
It reminds you of Mad Magazine's Spy vs. Spy, an infinite regress of move and counter-move, giving regulation itself a bad name and providing fodder for Wall Street Journal editorial mockery.
Unless the Treasury and the other agencies reverse course and drastically simplify the regulation, Volcker should return the Rule to sender and refuse to have his still honorable name attached to this travesty. Better to call it the Geithner Rule.
The back story: In the infighting of late 2008, President Obama's incoming economic team of Larry Summers and Tim Geithner marginalized Volcker as a senior official of the new administration, despite the fact -- no, because of the fact -- that Volcker had been one of Obama's earliest supporters and understood the dynamics of the financial collapse far better than either of them. They gave Volcker a ceremonial advisory position with no real power. Volcker was a menace because he was counseling more constraints on bank powers than Summers and Geithner wanted.
It speaks volumes about this administration that the most radical person in the room on the subject of banking reform was usually the former chairman of the Federal Reserve.
Then in early 2010, Scott Brown stunned Washington with his upset win of Ted Kennedy's former Massachusetts senate seat. The White House political team desperately needed a populist pivot and an emblem of tough financial regulation. Obama quickly sent for a surprised Volcker, who had never before been in the role of populist (but then everything is relative.)
The White House, using Volcker as a prop, conjured up a "Volcker Rule," in the spirit of the Glass-Steagall Act (which Summers and Geithner in their Clinton-era roles had helped repeal). Despite Volcker's gracious endorsement, the proposed rule was not as elegantly simple as Glass-Steagall, or as tough as Volcker's own counsel.
The thrown-together Rule was vague; it did not propose to separate investment banking from commercial banking. It constrained but did not entirely prohibit proprietary securities trading by government-guaranteed banks. By the time the industry got through with its legislative lobbying, the version that passed Congress as part of the Dodd-Frank Act was tough in principle but left room for mischief in the administrative rule-making.
As Joseph Stiglitz and Robert Johnson observe in a letter to the regulators that is must-reading if you care about this stuff:
To the extent the Volcker Rule is too complex, that is at best a reflection of the incredible complexity that banking itself has created, and at worst a reflection of the proposed rule's timidity: it attempts to protect the complexity of the status quo and implement a law that directs a reduction of trading by banks without reducing trading by banks or trading overall. These contradictions must be rejected. For the U.S. to rebuild a healthy financial system -- one where savings go to productive investments, and the returns go back the investors -- the Volcker Rule's mandate to reduce bank involvement in complex trading activities must be implemented. Naturally, banks are resistant to these demands because they have taken refuge in complexity to extract massive margins and fees that generate bonuses, while avoiding the harsh sunlight of competition and the risk-reducing incentives of the threat of failure.
Or as Paul Volcker himself declared, in his own comments on implementation of the rule that bears his name:
In essence, proprietary trading activity, hedge funds, and equity holdings should stand on their own feet in the market place, not protected by access to bank capital, to the official safety nets, and to any presumption of public assistance as failure threatens.
Amen. Most of the financial engineering that caused the collapse was not about innovation to improve economic efficiency. New creations such as collateralized debt obligations or credit default swaps had two core purposes -- to disguise the real amount of hidden leverage and risk; and to protect outsized bank profits from the sunlight of real competition.
There is no good reason to allow a commercial bank to trade for its own account. The bank is likely to trade on inside information, creating a blatant conflict of interest between the bank ands its customers, as well as a moral hazard that the bank's extreme leverage will put the larger economic system at risk -- in just the way creation and trading of opaque derivatives caused the collapse.
How, after all, did the banking system function without these innovations, which only date to the 1990s? Answer: with a lot more efficiency, more modest profits for bankers, and far less potential to wreck the rest of the economy.
What the banking system needs now is drastic simplification. Commercial banks should take deposits and make loans. Investment banks, risking only their own money, should underwrite securities. Anybody who wants to gamble in securities trading should not also enjoy the privileges of being a banker.
The great unfinished remedial business of the post-crash reform is to study which innovations, if any, are worth keeping and how to carry out the overdue simplification of the financial system. The original Glass-Steagall Act ran only 37 pages. Investment banks and commercial banks were strictly separated, end of story. A properly fashioned Volcker Rule should be just that straightforward. Back to the drawing board.
Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His latest book is A Presidency in Peril.
David Coates: The Unfinished Business of the Obama Administration: Bank Reform
Ted Kaufman: Too Big to Fail and the Volcker Rule
As for the so-called Volcker rule, it's only one of a number of illusions thrust upon us that hold out the hope that if we can just get the regulatory regime right, everything will be hunky-dory again. This completely ignores the fact that rules and regulations have to be enforced by someone. And those someones, under our system, will always be subservient to capital, anticipating the day they'll take yet another circuit through the "revolving door."
The system, as some have noted, has finally reached the point at which so much wealth has concentrated in so few hands that it is unfixable. The Glass-Steagall type of reform, for instance, that was still possible in the 1930s is no longer possible today. We've passed the point at which any kind of patchwork can be effective.
In order to SAVE America, we need to elect enough Dems, WITH A MANDATE to outlaw almost all of the recent INNOVATIONS in Finance.
Almost all the INNOVATIONs cooked up in the last half-decade or so, have been designed to transform the activities of Finance, from the old adage of "making-money-the-old-fashioned-way" into sucker bets tilted in favor of Industry Insiders.
ONE OF THE BEST WAYS TO REGULATE THESE ACTIVITIES IS TO REQUIRE THE ORIGINATORS / GENERATORS TO HOLD ON TO AT LEAST 60% OF THESE FINANCIAL PRODUCTS.
TWO WORST INNOVATIONS
1) Designing financial products where insiders can profit on their failure. Economic Failures are relatively easy for financial insiders to generate when they can profit from doing so
2) Like the Enron energy traders, and current oil speculators, create instruments where insiders can profit by deliberately created artificial shortages. (ie currently 4 oil refineries are shut down for maintenance all at the same time)
Three-quarters of likely voters believe the nation’s top earners should pay lower, not higher, tax rates, according to a new poll for The Hill.
The big majority opted for a lower tax bill when asked to choose specific rates; precisely 75 percent said the right level for top earners was 30 percent or below.
The current rate for top earners is 35 percent. Only 4 percent thought it was appropriate to take 40 percent, which is approximately the level that President Obama is seeking from January 2013 onward.
Congress couldn't figure out how to write the law so they passed the job to regulators. No one but a bureaucrat would come up with this mess.
The only thing wrong with Dodd-Frank is that it is too weak, and watered down.
Being in the belly of the beast was terrifying. You could see, from the inside, the high stakes casino that was the 80's right before Black Monday. I walked out of Wall Street in disgust in 1985 after warning my boss of the armageddon to soon come our way.
All during those years, I missed and clamored for the return of Paul Volcker. When Obama brought him out of the shadows, I rejoiced with hope. Only to be dissapointed at what followed. Once again, the free-for-all crowd of Geithner and Summers pushed him back into the back room.
Sorry Mr. President but, you let me and many others down. Until we get Paul Volcker out of the shadows and send Geithner packing out of Washington, I have no faith in you.
The sad thing is the only people pushing to go back to the safe guards of Glass-Steagall are Senator McCain and Senator Cantwell.
Could I have voted for the wrong guy?
http://cantwell.senate.gov/news/record.cfm?id=324753
The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (IBBEA) swept away all state barriers to interstate banking. It allowed financial institutions to locate branches in other states and to purchase or merge with banks headquartered in other states.
The Gramm-Leach-Bliley Act (GLBA), also referred to as the Financial Services Modernization Act of 1999, repealed part of Glass-Steagall, tearing down the walls between banking, insurance and investments. Companies could now merge, partner and operate freely within each other's industries. The act also made it possible for the financial industry to group mortgage and other portfolios, selling them as investments.
Look the banks should be given a choice abide by Glass-Steagall or give up the FDIC. If they did I know where I'd put my money!
Read more: The History of Bank Deregulation | eHow.com http://www.ehow.com/about_5413083_history-bank-deregulation.html#ixzz1ncDooa2V
http://www.informationclearinghouse.info/article30620.htm#idc-cover
http://www.youtube.com/watch?v=N2Xh5eN2fXY&context=C385c0f5ADOEgsToPDskJUMGx97_UAlkzmBQOcns95
http://www.youtube.com/watch?v=N2Xh5eN2fXY
http://my.firedoglake.com/tucsonrobert1/2012/02/24/let-your-life-be-a-friction-to-stop-the-machine-23min-videoclasswarfilms/
http://www.reddit.com/r/occupywallstreet/comments/q5dj5/let_your_life_be_a_friction_to_stop_the_machine/
http://www.sott.net/articles/show/242046-Let-Your-Life-Be-a-Friction-to-Stop-the-Machine
http://www.monarosedaniels.blogspot.com/
http://www.blogger.com/profile/09876236100559161900
http://www.wiserearth.org/user/MonaRoseDaniels/section/main
http://www.huffingtonpost.com/social/Mona_Rose_Daniels
http://www.facebook.com/#!/profile.php?id=100003302155047
http://www.facebook.com/public/Mona-Rose-Daniels