Wednesday, February 3, 2010

The Volcker Rule

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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