Final Thoughts on Volckerfest 2010

The coming months will tell if the Volcker Rule and the prohibition on banks getting even larger will turn out to be substance or mere spin. I’m finally getting around to reading the transcript of the pre-announcement media briefing and I found a few things that were worth a smile.

1. On the cap on a single institution’s share of liabilities: “The 10 percent cap on insured deposits exists in current law. It was put in place in 1994. And what we’re saying is that deposit cap has served or country well.” Um, then why did you waive it for JPMorgan Chase, Bank of America, and Wells Fargo?

2. Then here’s the bit on how it’s forward-looking only:

“It’s designed to make sure that we don’t end up with a system that some other countries have in the world, in which there’s enormous concentration in their financial sector. So it’s designed to constrain future growth. It’s not about reducing liabilities within — the share within the existing structure.”

End up with? The big four have 1/2 of the market for mortgages and 2/3 of the market for credit cards. Five banks have over 95% of the market for OTC derivatives. Three U.S. banks have over 40% of the global market for stock underwriting.

And again:

“It’s designed to constrain future growth so that we don’t have the extent of concentration you see in many other major advanced countries in the world that were — resulted in way more devastating damage to those countries during the financial crisis even than occurred here in the United States.”

Who are these other mysterious “major advanced countries”? United Kingdom unemployment is 7.8%, up from 5.2% in December 2007 (when our recession began). Unemployment in Switzerland is 4.4%, up from 2.8% in December 2007. Unemployment in Germany is 8.2%, down from 8.3% in December 2007. What countries exactly are they talking about? Iceland?

3. “Q I’m wondering why these proposals were not included in the comprehensive legislation you proposed in June.”

“The basic authority is provided in Chairman Frank’s legislation, for regulators to break apart major financial firms or to address problems with risky activities to the extent that they cause the firm to act in an unsafe or unsound manner that threatens the financial system. So we worked very closely with Chairman Frank on that already.”

Not exactly. The “basic authority” referred to must be the Kanjorski Amendment, which allows regulators to take action regarding a specific firm because it is a danger to the system (not just because it is a danger to itself). I don’t recall the Kanjorski Amendment being in Treasury’s initial regulatory proposal. (The Kanjorski Amendment is also hemmed in with all sorts of restrictions, like needing Tim Geithner’s approval for any action affecting more than $10 billion in assets.)

Or, more precisely, the answer is technically correct–they are claiming that they worked with Frank on the Kanjorksi Amendment, which may be true–but it dodges the spirit of the initial question, which was “Why didn’t you do this back in June?”

I know that administration officials have a tough job when they have to go out and spin new policies that (a) are significant changes from past policies and (b) may turn out not to be serious anyway. But that doesn’t mean I have to give them a pass.

By James Kwak

36 responses to “Final Thoughts on Volckerfest 2010

  1. The coming months will tell if the Volcker Rule and the prohibition on banks getting even larger will turn out to be substance or mere spin.

    I think everything we’ve already heard, including the lies and sophistry quoted in this post, has already provided the answer.

    Claiming they’ll hold the line at the existing obscene concentration proves they’re not serious about reform, and therefore proves they’re also lying about even that, since if they had the desire and will to hold the line they’d have the desire and will to roll it back.

    “Resolution authority” is a scam. They already have that, the PCA. We already know that in a crisis any pre-existing “plan” will be disregarded, overridden by panic and disaster capitalism.

    And the last I heard about the Kanjorski amendment it too was a scam, a “Trojan horse” as Ed Harrison called it, whose real goal was to let banks drag the FDIC into court. So the real goal is to obstruct rather than faciliate resolution.

  2. Could our write something positive for a change?

  3. our = you

  4. Yes. They really have a tough job muddling the important subjects (as in the opposite of clarifying so everybody could understand it). Please keep up your great work, d o n ‘ t give them a pass.

  5. I suppose Spain has done worse than the US in terms of unemployment, although they’re hardly comparable economies. A bit more reasonable than Iceland though. ;)

  6. Probably worth linking to Volcker’s own NYT op-ed this weekend.

    The White House and Congress will follow the usual game plan: Talk a good game, then pass some fake reform that does not jeopardize the Wall Street campaign contribution fire hose. There will be a lot of confusing back-and-forth over whether some 1000+ page bill constitutes “real” reform, the people will get confused and distracted, etc.

    But this time, We The People have a litmus test available: A reform is “real” if and only if Paul Volcker approves of it.

    I suggest trying to spread this word if you actually care about this issue.

  7. While Alistair Darling now states of the emergency of financial reform, we have two years…,elections coming, Yves Smith takes the ‘hard line’ and wonders if ‘we may need another crisis to produce the needed political will’

    http://www.nakedcapitalism.com/2010/01/volcker-does-not-get-it.html

  8. Don’t know if anyone has noticed but there is a new problem #1. Of course like everything else it’s “Made in China”

    http://www.msnbc.msn.com/id/35167044/ns/world_news-washington_post//

    Will take care of unemployment problem. We’ll need all the people we can get to make tanks, airplanes, bullets, etc.

  9. Like what?

  10. Volcker’s article (referenced by Nemo) in today’s NYT confirms Russ’s point that Obama’s proposal to limit the size of big finance is not to be taken seriously. Writes Volcker, “. . . keeping banks small . . . . does not really seem feasible in today’s world, not given the size of businesses, the substantial investment required in technology and the national and international reach required.” The other leg of the “Volcker Rule” pertains to proprietary trading by banks. Here too Volcker waffles; note the term “limit” (as opposed to “forbid,” etc.): “The further proposal set out by the president recently to limit the proprietary activities of banks approaches the problem from a complementary direction.” I think that to resolve Nemo’s thesis we need to unpack Volcker’s “limit”: How wedded is big finance to proprietary trading? How much of a “limit” could they live with? What loopholes lurk in any definition of proprietary trading?

  11. How do we know which side is he on?

  12. I mean, the world can’t be all bad?

  13. TPTB will continue to enable the pillaging “for our own good.”

    I’m telling you, only insurrection will bring an end to this monstrosity.

    No mere “reform” can solve our problems.

    Even Volker, who I believe means well, can’t think outside the box.

    Michael Hudson and David Korten – THESE are two economists who speak to me.

  14. “Who are these other mysterious “major advanced countries”? United Kingdom unemployment is 7.8%, up from 5.2% in December 2007 (when our recession began). Unemployment in Switzerland is 4.4%, up from 2.8% in December 2007. Unemployment in Germany is 8.2%, down from 8.3% in December 2007. What countries exactly are they talking about? Iceland?”

    For all the gloom and doom forecasted for Iceland, they have an unemployment rate of 6.9 %. Up from 1.9 % in Dec 2007. Quite an increase, but it helps to have a longstanding tradition of a supportive government.

  15. At least it will provide more food for statisticians: see my Reference List to my economics blog with economic data series, history, bibliographies etc. for students & researchers.

  16. Off to the land of analogy. You’re in the Garden of Eden. Fragrant flowers, blue skies, and an annoying tick-tick-tick noise. Better focus on the ticking noise for a while.

  17. Volcker has been a member of the highest (lowest?) levels of the global aristocracy for nearly his entire life. His father was the town manager of Teaneck New Jersey. (Not sure why, but this seems significant).

  18. Will their military equipment and operators function like the rest of what they produce? Tainted milk, poisonous children’s toys, etc. = missiles that blow up on launch or veer off into the ocean?

    Do they produce all of the hardware and computers they use for internal consumption? They certainly help themselves to external technologies, but how do they implement them?

  19. Rickk from Canada

    Mr. Johnson /Mr. Kwak, any thoughts?

    01/30/10 11:59 PM | AP | excerpt

    WASHINGTON — “The government’s response to the financial meltdown has made it more likely the United States will face a deeper crisis in the future, an independent watchdog at the Treasury Department warned.

    The problems that led to the last crisis have not yet been addressed, and in some cases have grown worse, says Neil Barofsky, the special inspector general for the trouble asset relief program, or TARP. The quarterly report to Congress was released Sunday.

    “Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car,” Barofsky wrote.”

    http://www.huffingtonpost.com/2010/01/31/tarp-watchdog-neil-barofs_n_443489.html

  20. Russ — well said. I find it hard to believe any intelligent person takes this stuff seriously. No one should be talking about it but the late-night comedians.

  21. Unemployment stayed lower in most countries for one reason – it really does not bother them to use taxpayer dollars to provide safety nets, and that includes for their banks.

    The original US Treasury proposal included a systemic risk regulator and resolution authority for TBTF.

  22. Rickk from Canada

    “Red is gray and yellow white,
    But we decide which is right.
    And which is an illusion? ”

    Days Of Future Passed, 1967
    Moody Blues

  23. Don’t forget to mention this spin job:

    Obama says he will get back “every dime” of the TARP money.

    The support provided, directly and indirectly has been MUCH greater than that. AND, the damage done is even greater. This spin is only a blatant attempt to let the financial industry off the hook.

  24. You’re evidently not one of the 6 million unemployed Americans. Or is it 17 million?

  25. Very pertinent sentences by Yves Smith today -

    “The big reason banks are too big to fail is that they control infrastructure which has become critical to commerce. Most important, they control the credit markets. And credit is essential to any economy beyond the barter stage.”

    Talk about cutting to the chase. Everything should start from Yves statement.

  26. Or are you just looking to take care of yourself? $hit on everybody else. Are you a banker?

  27. some guy in a cube

    OK, if you are pinning your hopes for reform on Paul Volker, then this whole damn thing really is a sham. But don’t mind me, I’m grabbing the popcorn, kicking back and thoroughly enjoying myself watching you knock yourself out.

  28. Were the ‘big five’ big enough before they were allowed to gobbled up their competitors? Now, after they have become even bigger monopolies, they give us the ‘nothing to see here, move along’. Of course it’s the same with Insurance, Media, Pharma, Military Contractors, and seeing Volcker waffle is tragic indeed.

    Finally, anyone catch Ol Hank P. on Sunday Morning? His ‘I told my wife to pray for me ’cause I didn’t have all the answers’ is one for the Tribunals.

  29. “End up with? The big four have 1/2 of the market for mortgages and 2/3 of the market for credit cards. Five banks have over 95% of the market for OTC derivatives. Three U.S. banks have over 40% of the global market for stock underwriting.”

    Mr. Kwak, it was expected when they embarked on this exercise more than a dozen years ago that no more than a half dozen US banks would dominate the industry.

  30. Rickk from Canada

    “some guy in a cube wrote”

    “OK, if you are pinning your hopes for reform on Paul Volker, then this whole damn thing really is a sham. But don’t mind me I’m grabbing the popcorn, kicking back and thoroughly enjoying myself watching you knock yourself out.”

    Alice wrote:

    “Curiouser and curiouser!” :-)

    http://en.wikipedia.org/wiki/Alice's_Adventures_in_Wonderland

  31. Rickk from Canada

    Brace yourselves …

    Sunday, Jan. 31, 2010 9:13PM EST – Globe & Mail – excerpt

    “There’s very little question that we’ve turned,” says the chartist and student of wave theory. “The rallies are weak and quite choppy and the volume is light. So even as the selling dries up, it’s not bringing in any buyers with conviction.”

    Equities will nosedive 50 to 60 per cent from current levels, he says matter-of-factly. “We will take out the lows from March, 2009.” And that’s his conservative estimate.”

    http://tinyurl.com/ye2w96h

  32. Overstatement. Staying strictly local, credit can be provided by credit unions, enabling an economy well beyond “the barter stage.”

    I wonder how much of the big-bank, stock market investment activity is actually necessary even to run a global-scale economy . . If we eliminated “credit” couldn’t businesses and economies build up their own cash base and do without borrowing? Like people who, instead of borrowing, save their money until they can buy a very modest first home outright, thus saving a fortune in interest, and ending their days much richer — and their children go forth with that inheritance. Why not that kind of economy for business? I think we are addicted to a system that isn’t the only way to carry on trade. Like slow food, we need to consider the possibilities of slow money.

  33. “Who are these other mysterious ‘major advanced countries’?”

    He’s talking about Canada, which has a tremendously concentrated financial system with 5 banks owning 90% of deposits, and who as a result suffered incredibly during the crisis — oh, wait. I guess they didn’t suffer much.

    Never mind.

  34. No and I don’t think my ethics would allow that.

  35. Rickk from Canada

    engineer27 wrote:

    Who are these other mysterious ‘major advanced countries’?”

    He’s talking about Canada, which has a tremendously concentrated financial system with 5 banks owning 90% of deposits, and who as a result suffered incredibly during the crisis — oh, wait. I guess they didn’t suffer much.

    Never mind.”

    I agree both our nations share a similar financial oligarchy with similar financial-type structures. My feeling is, our Canadian oligarchs were not quite as swift or as aggressive as your own. Not for want of trying.

    http://en.wikipedia.org/wiki/Oligarchy