Below is some excerpts of Paul Volcker responding to Senator Mike Johanns in front of the Senate Banking Committee yesterday.
Senator Johanns didn't seem to consider the "Volcker Rule" to be all that relevant and appeared deeply skeptical. Several other Senator's expressed similar skepticism.
First, some background on the so-called "Volcker Rule". The rule is not intended to solve all the problems that were at the root of the financial crisis. Volcker said as much during the hearing. It is intended to limit speculative activity by bank's that have the benefit of FDIC and Federal Reserve backing.
The main criticism of it seems to be that it doesn't solve every problem that caused the crisis. Since when is it necessary for something to solve every problem to have merit?
The idea of the rule is to push the more speculative activity to places that can be allowed to fail without destabilizing the broader financial system.
Volcker Video
Senator Johanns: "Tell me the evil that you're trying to wrestle out of the system by this rule, if we were just to say great, were with ya, we pass it the way you want it passed. What evil disappears?"
Volcker: "Well I don't know whether you want to call it evil but I feel that I've failed if you are more confused than you were before. What I want to get out of the system is taxpayer support for speculative activity. And I want to look ahead. If you don't bar that it's gonna become bigger and bigger and it becomes/adds to what is already a risky business. And I don't want my taxpayer money going to support somebody's proprietary trading. I'll make it as simple as that."
Then later...
Senator Johanns: "It kinda reminds me what the chief of staff said: 'never let a good crisis go to waste.' And what we are doing here is we're taking this financial reform and we're expanding it beyond where we should be. And I just question the wisdom of that unless somebody can make the case to me that had this been in place the world would be different."
Volcker's response:
Volcker: "The chairman made the point that I would emphasize. The problem today is to look ahead, and try to anticipate the problems that may arise that will give rise to the next crisis. And I tell you, sure as I am sitting here, that if banking institutions are protected by the taxpayer and they are given free rein to speculate, I may not live long enough to see the crisis, but my soul is going to come back and haunt you."
We need more Volcker's.
Adam
Related post:
Volcker on Financial Innovation
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Origin of Newton's 4th Law?
"Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac's talents didn't extend to investing: He lost a bundle in the South Sea Bubble, explaining later, 'I can calculate the movement of the stars, but not the madness of men.' If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: For investors as a whole, returns decrease as motion increases." - Warren Buffett
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Notable Quote
"Warren and I have not made our way in life by making successful macroeconomic predictions and betting on our conclusions.
Our system is to swim as competently as we can and sometimes the tide will be with us and sometimes it will be against us. But by and large we don't much bother with trying to predict the tides because we plan to play the game for a long time.
I recommend to all of you exactly the same attitude.
It's kind of a snare and a delusion to outguess macroeconomic cycles... ...very few people do it successfully and some of them do it by accident. When the game is that tough, why not adopt the other system of swimming as competently as you can and figuring that over a long life you'll have your share of good tides and bad tides?" - Charlie Munger
Our system is to swim as competently as we can and sometimes the tide will be with us and sometimes it will be against us. But by and large we don't much bother with trying to predict the tides because we plan to play the game for a long time.
I recommend to all of you exactly the same attitude.
It's kind of a snare and a delusion to outguess macroeconomic cycles... ...very few people do it successfully and some of them do it by accident. When the game is that tough, why not adopt the other system of swimming as competently as you can and figuring that over a long life you'll have your share of good tides and bad tides?" - Charlie Munger