By Simon Johnson
Bloomberg reports this morning that Treasury is gently letting the Volcker Rule (limiting proprietary trading for big banks) slip – Secretary Geithner would grant greater discretion to regulators which, in today’s context, most likely means not make the restriction effective.
This step is consistent with the broader assessment of the Volcker Rules that Peter Boone and I have in The New Republic (print and on-line): the underlying principles are sound, but the Rules have not been well-designed, and top people in the administration show little sign of wanting to make them effective. This dimension of financial reform does not appear to be headed anywhere meaningful – and the main issues (bank size, capital, and derivatives) are not yet seriously on the table.
In the recent Senate Banking hearings on the Volcker Rules, John Reed – former head of Citibank – was adamant that the Volcker Rules made sense and could be made to work. His point is that the executives know who is taking risk with the bank’s balance sheet – it’s a well-defined group within any bank with its own (speculative) culture – and this should be discontinued for banks that are in any sense too big to fail.
You really do not want high octane speculators at the heart of this country’s largest banks. Make banking boring, Reed argues with conviction.