Paul Volcker Prevails

Paul Volcker, legendary central banker turned radical reformer of our financial system, has won an important round.  The WSJ is now reporting:

President Barack Obama on Thursday is expected to propose new limits on the size and risk taken by the country’s biggest banks, marking the administration’s latest assault on Wall Street in what could mark a return — at least in spirit — to some of the curbs on finance put in place during the Great Depression.

This is an important change of course that, while still far from complete, represents a major victory for Volcker – who has been pushing firmly for exactly this.

Thursday’s announcement should be assessed on three issues.

  1. Does the president provide a clear statement of why we need these new limits on banks?  The administration’s narrative on what caused the crisis of 2008-09 has been lame and completely unconvincing so far.  The president must take it to the banks directly – tracing the origins of our “too big to fail” vulnerabilities to the excessive deregulation of banks following the Reagan Revolution and emphasizing how much worse these problems became during the Bush years.
  2. Are the proposed limits on the total size (e.g., assets) of banks, or just on part of their operations – such as proprietary trading?  The limits need to be on everything that banks do, if they are to be meaningful at all.  This is not a moment for technocratic niceties; the banks must be reined in, simply and directly.
  3. Is there a clear strategy for (a) taking concrete workable proposals directly to Congress, and (b) win, lose, or draw in the Senate, running hard with this issue to the midterm elections? 

Push every Republican to take a public stand on this question, and you will be amazed at what you hear (if they stick to what they have been saying behind closed doors on Capitol Hill.)

The spin from the White House is that the president and his advisers have been discussing this move for months.  The less time spent  on such nonsense tomorrow the better.  The record speaks for itself, including public statements and private briefings as recently as last week – this is a major policy change and a good idea. 

The major question now is – will the White House have the courage of its convictions and really fight the big banks on this issue?  If the White House goes into this fight half-hearted or without really understanding (or explaining) the underlying problem of unfettered banks that are too big to fail, they will not win.

By Simon Johnson

55 thoughts on “Paul Volcker Prevails

  1. Prof. Johnson —

    Push every Republican to take a public stand on this question, and you will be amazed at what you hear (if they stick to what they have been saying behind closed doors on Capitol Hill.)

    And what are they saying behind closed doors, exactly?

    This is extremely welcome news. Related to Tuesday’s events in Massachusetts, perhaps? Or not?

  2. I wonder if this new development will be successful after the Massachusetts defeat.
    At least the administration is addressing issues with strong grassroots support…or outrage.

  3. These empty promises and a quarter will get you a cup of coffee at McDonalds.

    Until tax cheat Geithner & blow hard Summers go, everything else is meaningless crap.

  4. You, sir, are a first-rate idiot. This isn’t a moment for “technocratic niceties”? Finance — and especially financial regulation — is an incredibly technical subject, genuis! Of course, you wouldn’t know that, because you’re a freakin’ development economist, and you know next to nothing about finance.

    Don’t you understand that outside of the blogosphere and the world of journalists, everyone — including academic economists — has come to the conclusion that you’re a complete joke? I hope the book deal was worth it, because it cost you all your credibility.

  5. Whoops; I should have read more carefully.

    The less time spent on such nonsense tomorrow the better. The record speaks for itself, including public statements and private briefings as recently as last week – this is a major policy change and a good idea.

    Forgive me for spending time on such nonsense. Thank you, Massachusetts!

    Can’t wait to hear the actual proposal.

  6. Name calling? That usually results from low self esteem and a solution void.
    As far as technocratic niceties” I can only hope this means to Loose ones foot up the ass of anyone who stands in the way of restrictions.
    We the people are watching very closely and if you dont have good ideas to add to the discussion, get your dumb ass out of the way

  7. Well it’s about time. We the people are so tired of the smoke being blown up our arshes. I would love to see Geithner and Summers take a hike.

    Our President needs to pull his head out of the clouds and get down to real business: reform, reform and put up with NOTHING less.

    Glad Mass happened. Better late than never.

  8. I doubt President Obama will be so ‘solid’ in his home work as Simon points correctly what is needed. Signs lately from White House are all discouraging. President Obama does not want any political fights and he is not doing that ‘political street fight’ – I do not know for what kind of glory in after life.

    Every successful President has to fight for the agenda, that is missing here. Krugman clearly hammered this point well after really ‘disastrous’ comments by President about Health Care Reform in his ABC interview. Even a younger blogger like Ezra Klein shows more maturity and fighting spirit by invoking Ted Kennedy legacy in these trying times for Progressives or those who want to reform the system. But that is missing from President and this White House. It was also evident in the dastardly way White House tried to give ‘spin’ on the mediocre Dem candidate in MA Senate election even before voting was closed. Point is – President himself and White House are succumbing to ‘petty games and theater’ instead of concrete, thoughtful action.

    As Simon says, the real test is whether White House goes to Congress with concrete proposals about these proposed, Volcker inspired, ‘right’ changes and is ready to fight 2010 election for that. Considering the late ‘performance’ I would not bet.

    MA Senate loss was not just that Dems lost the election; it is the ‘realization’ by larger public and Progressives that we have really lost fiery Obama who promised the real change. Time has come to remind him for what did he go to White House?

    Look at the old guy named Paul Volcker – after legacy fully intact in history; he could have very well just retired enjoying fruits of his labor. But he kept on fighting, trying to convince anyone who is ready to listen him when White House Big Boys Summers and Bernanke were playing all the games to ‘thwart’ him. We need that relentless and firmness in policy prescriptions. Even today Volcker seems to be far more adept and qualified for the top Fed job than our – it is no fault of Fed – Bernanke.

  9. Put the brakes on big banks (& little banks,too). The question is does President Ob ama have the balls?

  10. I doubt any of the TBTF banks ever spoke to an economist about their business model. They just spoke to lawyers and lobbyists. Not even very good trolling dlake, I suggest you go start up your own blog and see how the readers flock to your charm and enthusiasm. Ha. Ha.

  11. dlake –

    You better hope Obama succeeds in coming up with a reasonable, lawful, and fairly drastic solution that satisfies simpletons like Simon, Paul Volker and me.

    Otherwise we are headed for a “one banker, one lamp post” type of solution.

  12. Given that the bank bailout has a recently estimated potential price tag of $17 TRILLION, it’s high time the administration did something ‘radical’ (and progressive and popular/populist) to course-correct. Why don’t you go for broke while you’re at it, and bring back a single-bill version of the Public Option (consistently polling in the high 70-percent range popularity) to pass in reconciliation? The icing on the cake could be redeploying Geithner, Summers and Emanuel to various European policy-wonk boards to, umm, “maximize the administration’s diplomatic efficacy”.

  13. I thought the teabaggers were miffed that the banks got bailed out with taxpayer money and giving themselves big bonuses. You’d think they would be on board to regulating the banks. But then, they are so easily manipulated no telling what they believe in. Everyone else will get it.

  14. Simon says, “The major question now is – will the White House have the courage of its convictions and really fight the big banks on this issue?”

    Well, that’s what leadership is all about, right? I guess we’ll find out soon enough (maybe too late) what Obama is made of.

  15. Simon,

    Have you read the reforms proposed by the Treasury and the administration back in October? (89 page paper)

    (More here)

    If so I was wondering if you could elucidate for me how what is being talked about now is significantly different than what is in the papers I linked to. And also how the explanation of why the banks failed that are presented in the paper is woefully inadequate.

    I’m partly asking since I haven’t seen hardly any financial policy wonk take a long hard look at these proposals, even though I’ve seen plenty of analysis of what the House passed.

    If you have addressed this paper before my apologies, and I’ll comb through the archives.

  16. This could be a very positive step for President Obama. But he has to really stick to his guns on this if he wants to keep the American public on his side.

    I think one problem is Rahm Emanuel has this thing in his mind that he thinks if President Obama fails on any policy stance who will lose people. This is an issue even if the President fails to obtain the objectives people will respect President Obama more if he goes FULL THROTTLE on this issue EVEN IF HE FAILS. The people who are against this wouldn’t vote for him anyway, So President Obama has nothing to lose taking this one on with his ears pinned back (don’t take that the wrong way, we adore your ears Mr. President) and swinging like Clubber Lang.

    I don’t want a direct link to WSJ—even THAT article was very poorly worded by the WSJ guy. Hopefully as this story progresses we can get links to Bloomberg or Binyamin Applebaum or someone who is actually serious about letting us know what is happening in an objective way. I plan to do a post in the very near future on this at my blog, but I’m not going to link to that Republican rag.

  17. Without splitting the investor banking from the lender banking this is so much nothing. they will still be too big to fail and they can be assured that we, the American suckers will continue to bail them out without anything more than a squeak. The American masses are hopelessly complacent. This country is in a pathetic state. Entertainment, hatred and stupidity pass for news these days and the perfectly ignorant eat it up as if it is god’s message straight to their ears.

  18. I have a request that I would like to make to future Juris Doctor Kwak, Professor Johnson, and all the good gentlemen and lady commenters of this site. Could we change the nomenclature of this site from now on???

    Instead of saying “that other acronym” could we say STB??? Systemically Threatening Banks. Ok let’s say it together 3 times so we don’t mess up by habit.

    STB—Systemically Threatening Banks
    STB—Systemically Threatening Banks
    STB—Systemically Threatening Banks

  19. A good idea agreed – at last a sign that the government “gets it” and genuinely wants to tackle the TBTF issue, albeit in a roundabout manner.
    Of course, getting it past is another thing, but with enough momentum… And of course the banks will secure large enough limits to be able to continue expanding prop trading for some time, but even so, it’s progress just bringing this to the table.

  20. Mass defeat? Like who cares. Are you people that stupid?

    This thing has been on agenda for MONTHS. God, this country is dumb.

  21. Until I actually see the thing (1) conceptually strong and severe, (2) enacted, (3) aggressively enforced, I’ll assume it’s another scam.

    We know Obama doesn’t really believe in any of this and is making such proposals only under the duress of Massachusetts, bad approval ratings, and other political setbacks.

    Occam’s Razor says that until further evidence comes in, we must see this as a reprise of the “public option” scam with health care.

    There’ll be big talk at the outset, then by design they’ll let it be first watered down and then, they hope, extirpated completely.

    And even if it passes (they say they want it to be part of the already-gutted finance “reform” bill, and this when the Senate is planning to dump the already-enervated CFPA!) it would still have to be enforced.

    But recall Bush on the EPA regarding carbon. They preferred for EPA to have no enforcement authority, but failing that they wanted the authority to be only discretionary, and with lots of loopholes.

    Anyone want to bet on how they’re going to try to constitute this “authority”?

  22. This is obviously a troll, but I nevertheless can’t help pointing out what a great premise the post sets out – that the only people who should be fixing financial regulation are the people who have finance degrees and have worked on Wall Street. I mean, that har worked SO great for us, hasn’t it? :)

  23. Umesh: “… Time has come to remind him for what did he go to White House?”

    I saw a documentary filming up close Obama’s 2 year long campaign: the very, very long hours, the tiring travels all over the country. It also showed the energy and the very long hours of all the dedicated volunteers and the gradual disappearance of cynicism at voters.

    Seeing that documentary more than a year after Obama’s complete surrender to Bonus banksters was a disturbing experience.

    Why did he run?

    During the campaign he said “Yes we can”. In the White House he says “Yes we can change heath care, if we give in to everything Republican Olympia Snow asks for” (who then, being from the party of No, votes No anyway).

    During the campaign he said “Yes we can”. In the White House he says “Yes we can, except changing Wall Street”.

    It appears that all the enthusiasm and the grass roots movement that helped him get elected has collapsed. Why did the Obama White House not use it to help them force Congress to make the changes necessary? Why oh why?
    Why did he waste a full year before starting to listen to Volcker (and Stiglitz, and Simon Johnson to follow?)?

  24. If the administration is planning “some of the curbs on finance put in place during the Great Depression”, a 4th assessment should be history:

    4. Please cite specific examples where this proposal has worked. When was it put in place? What were the measurable effects?

    Obviously this is a red herring because none of Hoover and FDR’s economic plans worked in the 1930’s and 40’s… unless the president’s plan is “Let’s have a world war. Shipping 10% of workforce oversees will solve unemployment and war production does wonders for GDP. ‘Surges’ just aren’t cutting it. We propose a new World War, like my hero FDR.”

    Your 3rd assessment about a plan for Congress and the Senate is meaningless. If the Administration has the analytics to back it up their plan, it will pass both houses easily.

    You only need to worry about selling the plan to Congress and the Senate if you don’t have proof that it works.

  25. dlake: “Finance — and especially financial regulation — is an incredibly technical subject, genuis (sic)!”

    Wall Street has succeeded in making finance very complicated, thereby obfuscating the huge, hidden fees they extract from the economy, and the huge risk the pose to society (financial weapons of mass destruction).

    Volcker has challenged Wall Street and the City of London to show what benefits the financial ‘innovations’ have given society. They have not been able to answer, other than claiming to be doing God’s work.

    One does not need to be a genius to understand that we need TRANSPARENCY: in finance, in regulation, in funding of political campaigns.

    We do NOT need complex, complicated, loop-hole prone 2000 pages financial regulations laws!

  26. dlake’s outburst is pretty extraordinary. The whole point of avoiding “technocratic niceties” is to get ACTION on the TBTF banks’ activities via simple and clear action. Sure financial reform can be complex but this is missing the point. The US cannot afford a re-run of this saga, nor can most other countries. In the UK, bank balance sheets are approx. 450% of GDP. If dlake wants a good example of “technocratic niceties- look no further than Basel II- a supposed global standard of capital adequacy, which took 10 years of analysis paralysis and was dead on arrival. The ludicrous consultathon, which would have satisfied even dlake’s taste for complexity, ended up provoking a considerable part of the current mess by failing to see the wood for the trees and allowing banks ample time to indulge in regulatory arbitrage. That way lies madness, irrespective of the good intentions of the Central Bankers. Academics generally are not “good” at markets, Dr Volcker is an outstanding exception. If this attempt passes then the US will have regained control of the levers of economic power and will have ample cause to thank him.

  27. Perhaps we/he/they should begin by reinstating the 1930 (second) Glass-Steagall Act. It regulated banks quite nicely, at least it did until 1980 when avarice and a loss of memory caused it to be repealed.

  28. Well, the presence of Volcker is encouraging, but we’ll have to see if it really means anything in bank regulatory reform…and I suspect it will mean more blather than action.

  29. 1. I’ll believe the change when the change is implemented. Obama’s words ring hollow. He is the boy who cried “wolf.”

    2. Why isn’t Glass-Steagall reinstated?

    3. People still need to be prepared for the continued depression/recession. “It’s the DEBT, stupid.” We still need DEBT levels to come down, via payment or default (more likely).

    5. Much of the public won’t like it, but home prices need to come down in many parts of the country. The government needs to STOP PROPPING UP THE MORTGAGE MARKET. The government needs to stop “backing” sub-prime loans. * This is what needs to happen to make homes truly affordable!

    63. The government needs to let Freddie and Fannie bond and shareholders going to take a hit for the losses, instead of the US taxpayers!! And then shut those institutions down.

  30. Complexity = rent. Obfuscation = theft.

    Given the scale of Bill Black’s accounting control fraud, of course finance is highly technical, in the same way that soldiers are heavily armed, and looters carry large sacks.

  31. Hard to argue with this — there’s really no way to regulate these guys so they don’t do anything stupid, so the only thing you can really do is keep the commercial banks separate, and thus limit the damage done by the gamblers to the real economy.

  32. The progressives (including you Dr. J) became disillusioned with the ‘change’ that never happened. Ask yourself why is the president only now focusing on the banksters. You likely believe that he has come to his senses. I hope you are right but am pretty sure that you are wrong.

    When Obama claws back the hundreds of billions of non-Tarp benefits (and associated bonuses) that his administration gave to the banksters and when he removes the lobbyists from his administration and from DC I will start to be convinced. Otherwise this is just more words and more lies that will be spun.

    Your commentary has been greeted with great fanfare on the liberal blogs (e.g. Huffington) whose audience (and perhaps yourself) has been desperately seeking a remedy for the disillusionment they have experienced.

    I suggest that you are doing great disservice by so readily accepting the words of someone who has consistently said one thing and proceeded to do the exact opposite.

  33. Very well stated. Since most Americans today crave distraction over knowledge, ignorance and apathy are the sad byproduct.

  34. I think I’m the second person to request a clarification of this passage:

    “Push every Republican to take a public stand on this question, and you will be amazed at what you hear (if they stick to what they have been saying behind closed doors on Capitol Hill.)”

    What are they saying behind closed doors? That they’d support such reform? Battle against it to the death, even if they think it’s a good idea?

  35. All so true. It is amazing to this Canadian of the lack of appreciation by most Americans of what is truly at issue over the last 20 years. We in Canada have regressed into the same apathetic “change the channel” irrational vacancy especially over the last 4 years of Harper regime.

  36. The trouble with Obama is that he’s been acting like a senator instead of a president. He’s always willing to trade and compromise much too soon in the process. What he’s really got to do is be an active advocate of reform. Hold back the compromise for the last minute save; spend most of the game fighting hard for the needed reforms.

  37. Yeah. Obama’s the first president to ever lie. Ever. And he could never carry out on something he says. It’s unpossible!

  38. Now the Tea Baggers will have to put up or shut up. This is what they have been badgering us about for months-to do something about the big banks. But I’ll bet all you will hear is that this isn’t good enough or other “reasons” to oppose Obama because the big money Republicans behind their movement don’t want anything to do with real reform.

  39. It is wonderful that President Obama has seen the light here. But does anyone think that he has a chance of implementing anything now? How many Republicans will back anything he proposes, let alone what they will surely characterize as government meddling in our banking system?

    Thanks to Simon and James for fighting the good fight for over a year now. It is so sad that it has all come to naught. I shudder to think of the consequences on our economy and our republic.



  40. In your commentary: ‘Paul Volcker Picks Up A Bat’ you note Volcker’s position for restoration of the Glass-Steagall principal. It is the only sane way of returning banking to purposeful societal function. Current practices stand banking on its head, both commercial and investment, by reducing liquidity. In effect fluidity is masquerading as, and being mistaken for, liquidity. The fundamental breakdown is systemic failure to move money to the productive users, the banks’ customers. Commercial banking is a simple business: enabling commerce by moving money; its ‘commodity’. There is no legitimate place for proprietary use of holdings, not for trading or anything else, because a bank should not have excess funds: such a condition indicates its lending rates are too high. Investment banks could take house positions when they were partnerships, but only as a limited adjunct to their business lines: capital formation and financial market making. Else they would have merely amounted to investment clubs. But for investment bankers to trade proprietarily as at recent scaled up levels is illegitimate when they are in public corporations, thus employed at the service of their shareholders, and then reward themselves with bonuses as if they where still partners in a private firm. Banks must be chartered and should be held to their obligations. Volcker is dead on: commercial banking is boring, provides limited returns but a regular stream of them over time and is inherently stable. Reseparating the investment and finance functions from depository institutions would immediately eliminate the tempting pools of money that have been diverted to such tragic effect by the supermarket banks. Reconstituted Glass-Steagall rules by themselves should diminish bank size even without specified limits.

  41. Prof:

    The president says that proprietary trading must be curtailed, could you tell me which prop desk brought down or nearly brought down any banking institution.

    Dude, you’re supporting people who are fighting the wrong war.

    There was not one prop desk that risked bringing down any of these banks.

    Is it the water in Cambridge that causes mental dislocation?

  42. Very suspicious timing for these proposals if you take into consideration the supreme court decision to unlimit lobbying laws and the Masachusets Senate vote.

    I think this might be an administration ploy to build support for Obama whilst ensuring his bankng reform proposals fail.

  43. Amen. The time is right to reinvoke Glass-Steagall. What Republicans can oppose it? That single act would seriously change the course of big finance. Obviously more things will be necessary, like removing all government guarantee programs and legislatively banning bailouts of TBTF firms (and all others). The government can start by using their 37% ownership of CITI to deny its executives bonuses and require that the capital be retained and lent.

  44. It’s been a week, and not a peep about this from Obama or anyone else in the administration except for Elizabeth Warren. And nothing about this mentioned in the State of the Union speech, which was safe, political, and as far as the Big Banks go, only included a slap on the wrist in the form of taxes on bonuses. I have very little faith that Obama will confront the big banks. In my estimation, he remains a neoliberal corporatist, who will let the Banksters continue on their casino course, which will almost surely lead to another even worse recession.

  45. Banks, auto companies, IT companies, etc…infact ALL large companies are a threat to long term survival of the human race. The positives are innovations? ease in life style? which, in most cases we dont even need. The whole world needs to slow down. This rapid “progress” is attractive to certain countries who have enjoyed its fruits in the last 100 years but pause and think what will happen when countries like China, India and Brazil SUCK up the worlds resources in unprecendented speed and create even larger banks, conglomerates…

    The catalyst of these heated economies is GREED and the tool is LOANS. If all can learn to live within their means and take loans only in case of emergency, we will all be much better off. What is the use of a house that is really owned by a bank whose workings, strengths, vulnerabilities i am not aware of? why love some ‘thing’ that i dont really own?

    All the pundits of finance look for fame ‘today’ but has any one of them really left a positive legacy? They have been proven wrong time and again by the repeated crashing of the financial systems.

    With the advances in communication channels, the economies are more and more inter-locked, companies are getting more and more bigger, loan sizes are increasing, and so is poverty.

    The crashes are getting bigger and occurring closer together……and the losers are ALL of the human race with NO winners.

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