Monday, February 13, 2012

The Volcker Rule

I find this article to be unbelievable.

Paul Volcker, the former chairman of the Federal Reserve who rescued America from high inflation, high unemployment, and high interest rates in the 1970s (remember 18% interest rates?) proposed a rule that prevents banks from making speculative bets with deposits. It sounds like Glass-Stegall redux: separate deposits from speculation.

The article feels an introductory lesson in how to spot the bias in an argument.

The very industry that brought us to the brink with their creative weapons of financial mass destruction, such as credit default swaps (selling fire insurance on your neighbor's house) and mortgage-backed securities (sending tranches of mortgages through a meat grinder to turn them into AAA rated securities, good as cash), criticizes the proposed rule. Jamie Dimon, the chairman and CEO of JP Morgan Chase, said "Paul Volcker by his own admission has said he doesn’t understand capital markets. He has proven that to me."

If that's true, I prefer the fruits of Mr. Volcker's ignorance to Mr. Dimon's subtlety and cleverness, every time.

I know less than either of these gentlemen, so I can't say that I have proof that the short-term loss of liquidity will not harm the economy. But with interest rates at an all-time low, Facebook able to raise $10B in an IPO, and the European Central Bank pumping trillions of euros into the Eurozone to prop up the PIGS, I don't think liquidity is a problem in the short term. It feels riskier to allow banks to operate unchecked. Yet nothing significant has been done to curb them in the last three years. The too big to fail are only getting bigger, and the rest of us are taking on more of the risk.

The arguments put forth in the link are the very ones that persuaded the House and Senate to send the Gramm-Leach bill to be signed by President Clinton in 1999. I'm not sure about the harm to the larger economy, but I know restricting these activities will have a tremendous impact on the bonuses paid to bankers.

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