Tuesday, December 15, 2009

The Dean of the Rockefeller Camp Speaks

More and more focus is being placed by MSM on the thinking of Paul Volcker, despite President Obama's attempt (Read: Larry Summer's attempt) to isolate him as the chairman of Obama's burial ground, the Economic Recovery Advisory Board, for heavensake Obama even put know-nothing, moneybags Penny Pritzker on the do nothing board .

But one should never ignore a key Rockefeller operative. Here's Simon Johnson on what Volcker is up to:
The guiding myth underpinning the reconstruction of our dangerous banking system is: Financial innovation as-we-know-it is valuable and must be preserved. Anyone opposed to this approach is a populist, with or without a pitchfork.

Single-handedly, Paul Volcker has exploded this myth. Responding to a Wall Street insiders‘ Future of Finance “report“, he was quoted in the WSJ yesterday as saying: “Wake up gentlemen. I can only say that your response is inadequate.”

Volcker has three main points, with which we whole-heartedly agree:

“[Financial engineering] moves around the rents in the financial system, but not only this, as it seems to have vastly increased them.”

“I have found very little evidence that vast amounts of innovation in financial markets in recent years have had a visible effect on the productivity of the economy” and most important:

3. “I am probably going to win in the end”.

Volcker wants tough constraints on banks and their activities, separating the payments system – which must be protected and therefore tightly regulated – from other “extraneous” functions, which includes trading and managing money.

This is entirely reasonable – although we can surely argue about details, including whether a very large “regulated” bank would be able to escape the limits placed on its behavior and whether a very large “trading” bank could (without running the payments system) still cause massive damage.

But how can Mr. Volcker possibly prevail? Even President Obama was reduced, yesterday, to asking the banks nicely to lend more to small business – against which Jamie Dimon will presumably respond that such firms either (a) are not creditworthy (so give us a subsidy if you want such loans) or (b) don’t want to borrow (so give them a subsidy). (Some of the bankers, it seems, didn’t even try hard to attend – they just called it in.)

The reason for Volcker’s confidence in his victory is simple - he is moving the consensus. It’s not radicals against reasonable bankers. It’s the dean of American banking, with a bigger and better reputation than any other economic policymaker alive – and with a lot of people at his back – saying, very simply: Enough.

He says it plainly, he increasingly says it publicly, and he now says it often. He waited, on the sidelines, for his moment. And this is it.

Paul Volcker wants to stop the financial system before it blows up again. And when he persuades you – and people like you – he will win. You can help – tell everyone you know to read what Paul Volcker is saying and to pass it on.
It would be interesting to see more details on Volcker's "tough constraints". Just who would it benefit and who would it take down?

That said, I, for one, believe that derivative creation has gotten way out of hand, but there is a simple solution to the "derivatives problem." Those who operate in the land of exploding derivatives should be allowed to blow themselves up. Depositors will quickly learn to keep money away from such wild west banks.

By adding more regulations, Volcker is ignoring the simple solution of bankruptcy for those who take on risky positions. Further, he is creating a new level of power and regulation that will be gamed by the shady. Volcker may get part of the problem with derivatives, but his solution suggests he has no clue as to the dangers of creating new power/regulatory points (or maybe he does).

1 comment:

  1. From what I've read Volcker doesn't want to regulate derivatives. He wants them used outside commercial banking.

    Bloomberg and Der Spiegel published Volcker's thoughts. I have links to them in my piece: