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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

December 11, 2013 at 10:17 AM

The Volcker rule: A good start


Paul Volcker, circa 1980. (AP Photo/Chick Harrity)

Paul Volcker, circa 1980. (AP Photo/Chick Harrity)

The Volcker Rule, named after the cigar-chomping former chairman of the Federal Reserve Board who championed it, is finally in place. It aims to prevent banks from risky speculation, known as proprietary trading. The fact that Wall Street and the big banks fought it so hard shows it’s a good policy. But it is only a start.

Unfortunately, proprietary trading wasn’t one of the leading causes of the financial meltdown that caused the Great Recession. The Volcker Rule would not have saved Washington Mutual.  Yet proprietary trading still represents a huge systemic risk. JPMorgan Chase’s $6 billion “London Whale” loss came from just such a hustle.

The Too Big To Fail Banks are backed by U.S. taxpayers. Paul Volcker himself argued that the rule would mitigate the culture of risk-taking that was indeed behind the collapse.

But this and the overall Dodd-Frank law — many pieces of which have yet to be translated into rules — are not enough. There’s also the risk of the banks finding loopholes, although regulators finally came together to prevent the worst of these.

What do we need?

  • Break up the To Big To Fail Banks. They were put together through mergers. They can be disassembled again.
  • Enact a transaction tax on trading of exotic derivatives and other grifting that doesn’t assemble capital for productive businesses or create jobs.
  • Provide disincentives for high compensation on Wall Street and in the banks that rewards risk-taking that is implicitly backed by taxpayers if things go wrong.
  • Create much more robust regulation of derivatives, making them transparent and open to auditing and assessment of their risk.
  • End the revolving door between Wall Street and Washington. Tim Geithner, moving from Treasury Secretary to a lucrative position in private equity is a classic example. This is one way regulators become “captured.” Make all senior officials sign the equivalent of a “non-compete” preventing them from taking a job in the “financial services industry” for five years after they leave government service.
  • Reform the legal system to make it easier to prosecute and prove guilt in white-collar criminal cases.
  • Extend the regulatory net to the shadow banking system.

None of this will be easy given the massive political power of the banks. It may take another financial meltdown before these are enacted. But until this happens, we won’t have the safe, sound and boring banking system we need.

And even then, the job won’t be done until the leaders and cultures of our financial system return to an ethical standard. It can’t be taught in business school. Laws can only go so far. Recovering the decency and integrity that should be at the heart of a healthy capitalism is the toughest task of all.

And Don’t Miss: JPMorgan Chase, the Foreign Corrupt Practice Act and the corruption of America  | Robert Reich

Today’s Econ Haiku:

Just a friendly chat

Boeing and the Machinists

Could this thing take off?




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