The Problem With The Volcker Plan: We Need Volcker To Run It
It was a disappointing but not surprising piece in the NYT today from the man we still regard as the greatest Fed Chairman in history. Paul Volcker’s long and rambling commentary re-states one inoffensive but irrelevant reform proposal and another that would perpetuate the worst in the current system.
The small but irrelevant proposal is to forbid commercial banks from running proprietary trading desks or hedge
funds. Sure, fine, forbid away. But the prop desks at Citi or the other commercial banks played no essential role in the mortgage crisis.
The big proposal Volcker endorses is a new “resolution regime” much like the one laid out in the House bill passed last December. Unfortunately the new regime looks exactly like the old regime plus some not very binding promises to be appropriately mean to management and shareholders next time they mess up.
Worst of all the “new” regime perpetuates the reign of regulatory discretion that created the mortgage crisis in the first place. It does not, for instance, impose new statutory capital requirements on banks; it simply gives a super-council of regulators the right to do so as they think necessary. The same council would have the job of deciding which firms were too big or too reckless to be allowed to continue in their current form.
In short, Volcker’s proposal does nothing to get rid of the club, the cozy coterie of regulators whose contribution to bank safety in the last couple decades was to exert irresistible pressure on the big banks to do exactly what the banks wanted to do anyway. The Volcker approach does not break up the club—it expands it. It’s as if Mr. Volcker, who secured a place in the history of bank regulators by the extraordinary feat of doing more good than harm, does not grasp how amazing his achievement was.
Underlying this expansion in the discretionary power of regulators is the bizarre notion that the regulators did not stop the mortgage debacle because they were overwhelmed and outfoxed by those tricky bankers. If only the regulators had understood what the banks were up to they would have stopped them and saved the world.
Nonsense. it is hard to think of a period in U.S. history during which the banking system was more responsive to the government’s desires than the past couple decades. And in no area were the banks more compliant with government policy than in the making and capitalizing of mortgages or in procedures for managing the risks of that business.
The complicity of Mr. Frank and the other congressional overlords of Fannie and Freddie in promoting what is now called—by those very same overlords—predatory lending has been exhaustively documented.
Beyond pushing the banks to originate junk loans, was the fateful question of what to do with the junk once it was written. Both U.S. and global regulators, from the Fed and the FDIC to the Basel group and the International Monetary Fund, were, if anything, more enthusiastic about securitization and structured finance than the banks themselves. The Basel standards, for instance, score mortgage-backed securities as significantly less risky than individual mortgages. The black box risk management algorithms used by the big banks to assess their ever more complex risks, which completely and predictably failed, were endorsed and recommended by the same regulatory community.
Sorry Mr. Volcker, it just won’t work. They just don’t make regulators like you anymore.
Tags: Andrew Redleaf, bankers, banking crisis, banking deregulation, economy, NYTimes, Paul Volcker, Regulation, Richard Vigilante
