03/27/2010 05:12 am ET Updated May 25, 2011

Volcker Is Finally Getting His Due, at Least Till He Gets Snubbed Again

It can't be easy being Paul Volcker. One of the great economists of
the modern era, Volcker is best known as the Fed chairman who slayed
slagflation in the late 1970s and early 1980s. He was hired by
President Obama to provide economic advice and some adult supervision
in an administration that featured as other advisers people like the
Marxist-sympathizing Van Jones.

But then, when he offered his ideas about regulating the banking industry
in a post-bailout era, Volcker was routinely ignored, that is until
the president, witnessing the horror (for him and his followers at
least) of the election of Scott Brown, a Republican, to fill the Senate
seat once held by the late Teddy Kennedy, and the vanishing act of his
far left agenda, including socialized medicine.

And just like that, presto, the grumpy old man who refused to lower
interest rates 30 years ago -- acts that Obama would presumably oppose
given his support for the reappointment of the current, easy-money
loving Fed chairman Ben Bernanke -- Volcker is back in vogue. Last
week, he was seen alongside the president (with Treasury Secretary
Tim Geithner standing warily in the background) as Obama unveiled the
broad outlines of a financial plan Volcker has been advocating for
months now; something that if Obama lives up to his words would make
it difficult if not impossible for government-protected banks to mix
their risk taking activities like trading esoteric bonds if they want
to be protected by taxpayers as Too Big To Fail.

On the surface, it would seem like a victory for Volcker and a
commonsense move by the White House. After being shunned for months,
his ideas like calling for the separation of commercial banking (which
includes government protected deposits) and risk-taking investment
banking activities denigrated by Geithner and Larry Summers, Obama's
economic advisers and Wall Street mouthpieces, Volcker had won the
day. He finally convinced the president of the mountain of evidence
that one of the leading contributing factors to the 2008 financial
crisis was the a federal law passed in 1999 that allowed risk taking
to be combined with commercial banking activities.

But Obama's last minute conversion to Volckerism is, I suspect, less
about commonsense and more about politics. As unemployment remains
high and Wall Street is now handing out billions in bonuses just a
year after being bailed out, the president can call investment banks
"fat cats" all he wants. Obama's policies of the past year: Promised
taxes on small businesses to pay for his expansionist government, and
protecting banks have led to a dual economy. Unemployment in the
construction industry is at around 20% because businesses are hording
cash to pay for higher taxes when the financial types who caused the
2008 meltdown and the current Great Recession feast.

And now the president is paying the price.

Volcker, at 82, may feel as though this is his last act in a
long and storied career to do something great, but for my money, there
is something unctuous about the great Paul Volcker being used by the
president as a political prop. This is, of course, the man who refused
to bend to political pressure in the early 1980s, when the Federal
Reserve, under his rule, jacked up interest rates to nose bleed levels
in an effort to squeeze out inflation but squeezing the economy. His
rationale was simple: The short term pain was worth the long term gain
of lower inflation, which usually benefits lower income people the
most by making goods and services they need more affordable. He was
right, and for that, we're all thankful.

But this is a crusade where Volcker isn't leading the charge. The
final proposal (which could come in days, along with I am told further
limits on how much "leverage" or borrowing banks may engage in to
trade, and new capital requirements) will be hammered out by Obama's
political team, not Volcker. That's probably one reason my sources on
Capital Hill tell me there's still a dearth of information on the
final product.

In other words, they've been given no guidance as to how these
"reforms" will actually work. "We've been directed to a website with a
press release covering the president's announcement last week," said
one Republican staffer.

For that reason, look for a watered down proposal that does little to
address the notion that banks shouldn't be able to take risk on the
backs of taxpayers. Already, senior officials at Goldman and JP Morgan
are telling analysts and investors that the rules will be easily
evaded. They're designed, the Goldman folks assure anyone who asks, to
prevent so-called proprietary trading, where Goldman itself comes up
with an idea of how to gamble with its own capital, but not trading
that begins when a customer makes and order and then the trader
follows through with his own bet.

For the life of me, I can't figure out the difference between
the two since the firms in both instances are risking their own
capital, but Wall Street is making a case that the difference is huge and
the firms are flooding Washington as I write this column to influence the legislation.

How much of this jockeying for control of the final product Volcker
will stand before just calling it quits, is, of course, a matter of
debate. For the past year or so, I've been reporting that Volcker has
been ignored by Obama, shunned as the crazy old man with the wild-ass
idea of reimposing something like the Depression-era law known as
Glass-Steagall, which formally separated commercial banking from
risk-taking investment banking ideas.

Ironically, he received a better reception from some of his
contacts on Wall Street for this plan, who gave him their ideas on how
best to make such a separation of risk taking and commercial work
given the realities of the modern financial industry. Goldman Sachs,
of course, isn't a commercial bank like Citigroup. It doesn't have
branch offices, and it doesn't hold checking accounts, and yet under
the president's approach to regulation, the firm is protected like
Citigroup as too systemically important to fail even as it trades just
about every esoteric bond in creation.

Through it all, Volcker accepted all the snubs, that is,
until last week when the president woke up and realized he was right,
and there was Volcker standing next to the president getting his due,
until, that is, he gets snubbed again.