While many people have called for the giant, insolvent banks to be broken up, Paul Volcker argues for a different approach: making sure that the taxpayers aren't paying for their speculative activities which lie outside of traditional depository banking functions.
As Bloomberg writes:
As the Wall Street Journal notes:“I do not think it reasonable that public money --taxpayer money -- be indirectly available to support risk-prone capital market activities simply because they are housed within a commercial banking organization,” Volcker said.
Since January, Volcker has advocated that regulators should prohibit financial companies whose collapse would pose a risk to the economy -- those considered “too big to fail” -- from engaging in certain types of trading and investing activities. The administration wants stricter oversight for such companies and tighter capital and liquidity requirements.
“Extensive participation in the impersonal, transaction- oriented capital market does not seem to me an intrinsic part of commercial banking,” Volcker said. “Substantial involvement in heavily leveraged finance and heavy proprietary trading almost inevitably entails risks.”
“I want to question any presumption that the federal safety net, and financial support, will be extended beyond the traditional commercial banking community,”
Of course, the people with real power in the Obama administration - Summers, Geithner and Bernanke - don't want to break up or regulate the too-big-to-fails.Mr. Volcker said banks should be banned from "sponsoring and capitalizing" hedge funds and private-equity firms, which are largely unregulated. He also said "particularly strict supervision, with strong capital and collateral requirements, should be directed toward limiting proprietary securities and derivatives trading."
He also said collateral and leverage restrictions against the largest nonbank financial institutions "may be needed."
The comments reflect Mr. Volcker's long-held view that banks should act more in line with their traditional role and not take extremely risky gambles, which could threaten the viability of commercial banks and expose the Federal Reserve and taxpayers to large risks...
As Yves Smith has repeatedly pointed out, Volcker has been sidelined from the first days of Obama's cabinet nominations . . . even before Obama was sworn in as President.
If we just re-instate Glass-Steagall act, which forbade commercial banks from investing in markets, we would solve a good part of this mess. Our grand parents passed this act in 1933 right after the market crash. Of course, the baby boomers, still thinking that they're smarter than their parents, repealed the act in 1999.
ReplyDeleteThere is ABSOLUTELY no moral or ethical reason that taxpayers should ever bail out the speculative excesses of Wall Street. Our Government, in saddling current and future taxpayers with this fiasco and by repealing Glass-Steagall has committed one of the most immoral, corrupt and frankly fascist acts a government can. May they rest comfortably in Hell.
RBM
Volcker is right on the money. We also need to encourage the large systemically important institutions to down size. Geithner's or should I say Summers/Rubin's plan to just ask the banks to increase capital will fail, simply because decreasing leverage will in the end mean poor returns and no investor would provide capital to earn poor returns. Just a few opaque businesses provide any profits to the big money centers and at the expense of the greater economy..Case in point CDS trading.
ReplyDeleteI shudder reading Paul Volcker being quoted saying, "Substantial involvement in heavily leveraged finance and heavy proprietary trading almost inevitably entails risks."
ReplyDeleteThis quote sent my revulsion-needle almost right off the scale.
The phrase within the quote that hit my sour-button is "almost invariably".
Paul has it dead wrong there. There is no "almost" about it.
There is virtually no where in this economy where one can put their money to work without an immense -and- a increasingly booby-trapped risk.
The economy, -what there is of an economy- is so hopped-up on stimulus, -the moment any of these stimulus exercises is scaled back, -and regardless how safety-oriented or well thought through any entrepreneur has made his plans for putting his money and his effort back into the economy, -we are going to see a collapse (on top of the current collapse) like no other.
And this is why stimulus is always going to result in an even more aggravated deflation once the stimulus is removed. The real economy is so horrified, it becomes impossible to associate one's self with it any more.
Treasury Secretary Geithner has said in the last few days, he is in favor of extending the (up-to) $8500 tax credit stimulus for (so-called) first-time buyers of housing.
The economic bright light behind Geithner's continued enthusiasm for this ridiculous program is that of recognizing what he has come late to discover, -that this housing stimulus, like all the stimulus plans, has a wind-down deflationary impact that will devastate the housing industry -and- that will likely act as an explosive catalyst toward further destruction of the mired economy.
This is why stimulus is the wrong approach.
Stimulus only makes worse the all the stresses that undercut value in the marketplace.
It's like the big-bank stock prices that have gone up 4x (and more) in a few months. Anyone who is looking at this is saying, "Puh-lease! If that's not a bubble, then I don't know what a bubble is." And it is a bubble that will only last as long as the stimulus programs exist that are continuing to bail out all these massively insolvent too big to fail banks.
And now- due to Secretary Geithner's fear of providing a catalyst to the looming second collapse, -he wants to continue the errant stimulus policy.
Government is literally leveraging (at many levels) massive amounts of real estate debt in a futile effort to keep property prices high, way too high.
The tide is coming in anyway.
There is currently so much distressed housing on the market, -even ignoring the $8500 tax credit- the price of housing has continued to fall. The supply of distressed housing stock has continued to increase -even faster.
The $8500 tax credit cannot be ignored when measuring what is transpiring. The moment this housing stimulus was affected, it further depressed the real market value of all housing.
The moment this reckless stimulus is withdrawn, -housing will crash even further and faster than it was crashing before this stimulus went into effect.
And the auto industry too is feeling the same effect of the end of its own stimulus.
The whole economy is hopped up on stimulus, and still -once we factor in the cost of the stimulus -to the economy- it will be all too apparent, -stimulus has only accelerated a massively worsening recession.
This is what Ben Bernanke had going on in his head -as he said the other day in a moment of utter despair -that he thinks, -that he hopes against any reasonable hope, that the recession is coming to an end.
The recession isnt coming to an end, it ends in collapse of the system, and the American government giving dictoral powers to the Fed.
ReplyDeleteIt is by plan, and I do not believe you are ready to accept this. So let me spin this another way, put you in the drivers seat as in control of the Fed.
The question is what would you do if crashing the economy was your goal, knowing that when the emergency was right that political control of this nation was yours to wield.
How would you accomplish this??
Then contrast this against what has been done...
Simplified, all money is borrowed into existence, destroyed when paid back. But it is loaned at interest, and where does all that interest go??
Yeah, into private hands, those that control the money presses.
This is an old plan, on schedule, and will be worldwide, as the dollar has steadily gained importance globally since the founding of the Fed.
Thru chaos comes order, and this will be achieved thru the Bank of International Settlement, and the same group that controls the Fed becomes the defacto comptrollers of the world.
Now in a fair world all that interest would go to the commonwealth, to the people. There would be no need for taxes, and a huge need for vastly increasing social services and infrastructure to meet the new found revenue stream.
This would be responsible management of money, as the writers of the Bible, the Quran, and our founding fathers understood well..
All you must do is quit using the product...
Demand fair currency.
Just stop using the product.
So simple, yet so hard...
At this late stage in the game it is now your only option, and even then I dont believe it can be done.
Hey, but the market keepd rising, No troubles.
ReplyDeleteYes it is Chris, but it should be obvious that it is oversold. A quick perusal of P/E ratios should illustrate this.
ReplyDeleteAre you familiar with the concept of pump and dump??
You will see it firsthand in early October..