“The Volcker Rule”: Proposal from Former Fed Chairman Merits Further Discussion

I agree with the statement by Paul Volcker, former Fed Chairman, in his testimony before Congress on Tuesday:

“What I want to get out of this system is taxpayer support for speculative activity,” Mr. Volcker told the Senate banking committee. “I don’t want my taxpayer money going to support somebody’s proprietary trading.”

Gretchen Morgenson of the New York Times had an excellent analysis on how to deal with the “Too Big to Fail” financial institutions. Let me quote in part from her article:

[By] promoting the ideas of Paul Volcker — the esteemed former Federal Reserve chairman — the White House is finally elevating the discourse on how best to rein in risky behavior at banks and protect beleaguered taxpayers from future bailouts of Wall Street.

Those discussions are especially important, given that Congressional efforts to overhaul the financial system have thus far done little to ensure that we will never again have to fork over hundreds of billions of dollars to rescue bankers from their own bad bets. “Too big to fail” turned out to be “too hard to tackle” for lawmakers.

So the proposals from Mr. Volcker, a man whom the White House has marginalized in the strangest of ways until now, are a step in the right direction. That’s because they aim to keep highflying traders and other gamblers inside of banks from getting their hands on or putting at risk the old-fashioned savings of average depositors.

A main element to the plan would bar banks from making proprietary trades — using their own money to place directional market bets that are unrelated to serving customers. Another change would prevent institutions from investing their own money in hedge funds or private equity operations.

How Congress accomplishes this objective deserves serious debate and discussion, but the goal laid out by Paul Volcker is a worthy objective.