Making The Volcker Rule Work

By Simon Johnson.  This is the text of a letter (about 2,000 words) submitted on Friday to the Financial Stability Oversight Council, in response to their request for comments on the Volcker Rule.  The full letter is here and on  If you would like more background on the Volcker Rule and its political importance, please see this post and the links it provides.

Dear Members of the Financial Stability Oversight Council:

Thank you for the opportunity to submit these comments on the study regarding implementation of Section 619 of the Dodd-Frank Act, also known as the Merkley-Levin provisions on proprietary trading and conflicts of interest or as the Volcker Rule.


I would like to offer three main comments. 

  1. Mismanagement of risks that involved effectively betting the banks’ own capital was central to the financial crisis of 2008; this is why our largest banks failed or almost failed.  The Merkley-Levin Volcker Rule, properly defined, would significantly reduce systemic financial risks looking forward.  Congressman Bachus’s comment to contrary (as submitted to the FSOC, as part of the Public Input for this Study, dated November 3, 2010) is completely at odds with the facts.
  2. Trades need to be scrutinized in a detailed and high frequency fashion.  It is not enough to rely on relatively infrequent and “high level” inspections – or the established supervisory process.  The comments provided to you in this regard by Senator Harkin (dated October 20, 2010) – and also by Senators Merkley and Levin (dated November 4, 2010) – are exactly on target.
  3. The separation between banks and the funds they sponsor, in any fashion, needs to be complete.  The argument offered by State Street and other “Custodian Banks” in their comment to you (dated October 27, 2010) is worrying and potentially dangerous, because it ignores the basic economics that leads to bank failure.

The remainder of this letter expands on these points.

The Importance of the Volcker Rule

With regard to the importance of the Volcker Rule (e.g., for your Question #12), James Kwak and I provided a great deal of supportive evidence in our book, 13 Bankers: The Wall Street Takeover and The Next Financial Meltdown (see  American prosperity does not rest on having global megabanks of this nature and scale; we definitely do not need them to have proprietary trading businesses.  They pose great dangers to our financial system – and to taxpayers, as seen in the aftermath of the 2008 financial crisis.  Please be sure to take our analysis into account when considering this matter.

The Volcker Rule is not a panacea but if designed and implemented appropriately, it would constitute a major step in the right direction.  The effectiveness of our financial regulatory system declined steadily over the past 30 years; it is time to start the long process of rebuilding it.[1] 

With regard to your Question #6, on capital requirements, which is closely related to these general questions, I urge you to read the latest writings from leading analysts of this issue.[2]

In particular, I would stress that Professor Anat Admati and her colleagues find that stronger capital requirements would not be contractionary for the economy (see footnote 2).  Professor Jeremy Stein and his colleagues show that capital requirements can and should be increased through requiring specific dollar amounts of capital to be raised – rather than through requiring banks to hit a particular capital-asset ratio (see footnote 2).  If you proceed in the fashion that they recommend, stronger capital requirements will make the financial system safer – without any discernible effect on short-run growth and making it more likely that we can sustain reasonable growth rates over the next 10 years.

Related, and with regard to your question #10, Congressman Bachus argues at length that our international trading partners will not adopt any measures parallel to the Volcker Rule and therefore we should shy away from implementing the Rule.  This is a non sequitor.

Our biggest banks have become dangerous by any reasonable standard – the supporting evidence is the deepest recession since 1945, more than 8 million jobs lost, and a 40 percentage point increase in the ratio of privately held federal government debt-to-GDP.[3]  If other countries fail to follow our lead, that is worrying – mostly because they will be setting themselves up for further trouble. 

Please look at my assessment of financial sector policy and fiscal impact in Europe (joint with Peter Boone).[4]  Europe faces serious difficulties because of failures to control the behavior of major banks.  We should in no way be inspired to follow their lead.  The US needs to deal with its own problems first – and then encourage other countries to do likewise.[5] 

If dangerous and irresponsible activities – financial or otherwise – leave the United States for elsewhere, we should in no way encourage them to stay here.  Instead we should focus on warning others about why they (and the global economy) will not benefit from harboring and tolerating such behavior.

Congressman Bachus argues that implementing the Volcker Rule will hurt the shareholders of major banks.  This is far from clear – shareholders lost heavily when banks’ gambles went so dramatically wrong in 2007-08.  But even if it were the case, this would be irrelevant.  The goal of your rule making is surely not to help a particular set of shareholders, but rather to strengthen financial stability and increase the likelihood that we will not fact another devastating financial crisis. 

You should definitely and deliberately avoid actions that elevate the interests of bank shareholders above broader social concerns.  The goal here is precisely to step back from the “too big to fail” implicit subsidy arrangements that have developed around our biggest banks in recent years.

Degree of Required Scrutiny

Relevant to your Question #2, I strongly support the views of Senator Harkin, as expressed in his comment to you on October 20, 2010, as well as the positions of Senators Merkley and Levin, in their comment to you on November 3, 2010. I testified in favor of the Volcker Rule in February to the Senate Banking Committee and respectfully suggest that you take my testimony into account when considering this matter.[6]

On the same panel in February, representatives of Goldman Sachs Group Inc. and JPMorgan Chase & Co. pushed back strongly against the Volcker Rule.  Given the adamancy with which those banks argued so recently against the Volcker Rule, it is not unreasonable to wonder about their intentions now.

If a bank’s management wants to take proprietary risks using its own capital, these would be relatively easy to disguise on a trading desk as “customer flow” in some way. Some big banks have already announced that proprietary trading jobs will be cut, including at JPMorgan after the firm reportedly lost $250 million on coal trades in the second quarter (although perhaps these developments are not connected). Bank of America Corp. has announced that proprietary traders will be switched to other jobs within the firm.[7]

But as Michael Lewis asked recently: how would anyone know whether proprietary trading reappears in disguise? Lewis also pointed out that, at least in the case of Goldman Sachs, some of the most important transactions with regard to committing or protecting the firm’s own capital in the recent past were undertaken by their so-called Client Facing Group (see footnote 6). This doesn’t imply there was any deception, simply that risks can be placed in any number of locations within such an organization.

We know that big banks like to bet big, particularly as the credit cycle develops. Sometimes this goes well for them and their shareholders, and other times it goes badly as it did for Goldman Sachs when it reported losses on equity derivatives in the second quarter. When large bets go bad the damage can be so catastrophic that the entire credit system is disrupted and the tax payer is again on the hook.  Again, please consider my work with Peter Boone for your deliberation on this matter (cited in footnote 3 above.)

There is no way to handle the failure of global megabanks because there is no cross-border resolution mechanism or bankruptcy procedure that can handle their failure, a point I made with co-author James Kwak in 13 Bankers. The idea that too big to fail has been legislated away is simply an illusion.

There is nothing anti-business about wanting to enforce the Volcker Rule. Quite to the contrary, the severity of the financial collapse in the fall of 2008 was very much about how big banks acquired and mismanaged huge risks — not all of which were within officially designated prop-trading groups — and in the process damaged the rest of the financial industry and the broader economy.

The Volcker Rule may not be perfect but at this stage it’s almost all we’ve got. And with regard to voluntary compliance by the big banks, we should reflect on Ronald Reagan’s thinking with regard to nuclear disarmament commitments by the Soviet Union, “trust, but verify.”

Relationship Between Banks And Investment Funds

Relevant to your Questions #3 and #4, you received on October 27, 2010, a comment from State Street (on behalf of itself, Northern Trust and BNY Mellon), which I would strongly oppose.[8]

The State Street argument is that section 619 of Dodd-Frank could prevent a bank “from providing traditional directed trustee or similar services to its pension fund and other institutional clients.”

The issue, State Street points out, is “potential banks’ support for the investment performance of the fund” – that is, whether a bank would feel obliged to prop up the performance of a fund that is struggling. The problem with such propping up is that it will help a fund show better performance on average – and therefore help it attract more money – but it would also mean a bigger collapse, with much more devastating consequences, should subsequent problems arise (which is not so uncommon). Propping up is a fairly common phenomenon around the world.[9]

State Street and its co-signers argue that banks such as themselves frequently do not have investment authority over plans for which they are trustees. But this is not the issue.

The real question is whether a custodial bank of any kind would have the incentive to prop up performance of a fund (of any kind). This is the way that banks can find themselves committing capital, whether they originally intended to or not. The sounder relationship between bank and fund is that when bad things happen, the bank is content to let the fund fail (or just show disappointing performance).

State Street and the other big banks mostly just want to be left alone. “We’re responsible adults and we can take care of ourselves” is their refrain.  This was exactly the operating philosophy of Alan Greenspan, circa 1997: “As we move into a new century, the market-stabilizing private regulatory forces should gradually displace many cumbersome, increasingly ineffective government structures” (as quoted in 13 Bankers, p.101).

The new century has not, so far, gone well, precisely because “market-stabilizing private regulatory forces” turns out to be an oxymoron.

And the specifics at stake here are far from hypothetical. Remember that Citigroup had large “off-balance sheet” housing-related liabilities that it ended up bringing back onto the balance sheet – thus absorbing the losses and forcing itself closer to insolvency.[10] And even State Street had to prop up some of their “stable value funds”.[11]

Please do not repeat Mr. Greenspan’s tragic and costly mistake. We need a real firewall between custodian banks and the funds with which they are connected in any form. The Volcker Rule, if properly and rigorously applied, can do just that.

                                                            Yours sincerely,

                                                            Simon Johnson


[1] Not surprisingly, there is a great deal of agreement among leading academics, financiers, and other business people on the need to rein in – as much as possible – reckless risk-taking by very large banks.  As an example, see the endorsements provided by a broad cross-section of prominent figures for the arguments in 13 Bankers:

[2] These are available through links in the following articles: “Why Higher Capital Standards Are Needed,” and “Goldman Sachs and The Economy,”

[3] On the broader economic and fiscal impact of the financial crisis – and why we should fear a repeat of something similar in the near future, please take into consideration the points made in my testimony to the Senate Budget Committee twice in 2010: August,; and February,

[4] Available on-line as part of London School of Economics volume on The Future of Finance; our chapter is “Will the Politics of Global Moral Hazard Sink Us Again?” (pp. 247-288).

[5] The fact that our biggest banks want to become even larger and even more global should worry us a great deal – particularly as there is no cross-border resolution mechanism for banks on the horizon.  Please see the details and analysis in “Way Too Big To Fail,”

[7] For links to articles documenting these developments, please see “Proprietary Traders ‘Earn Trust, But Verify’”,

[9] For more background and an analytical framework on these issues, please see “Propping and Tunneling,” published in the Journal of Comparative Economics in September 2003 and available at

By Simon Johnson

71 thoughts on “Making The Volcker Rule Work

  1. There is simply no interest in making the Volcker rule work. The mere fact that it will take away a significant part of the source of funds that these institutions use to create bubbles makes it unpalatable to them. We will never see the Volcker rule take hold. There is too much at stake.

  2. “Dreams that do come true can be as unsettling as those that don’t.”

    Brett Butler, ‘Knee Deep in Paradise’

  3. “..James Kwak and I provided a great deal of supportive evidence in our book, 13 Bankers..”

    Clearly, Johnson is trying to sell more copies of his book at the expense of weakening the US banks.

    I would not be surpriced if he is an agent of a European bank absolutely hell bent on destroying the US financial system by resreing to his tome of Garbage.

    Is there any way to impeach a tenured prof at MIT?

  4. “..James Kwak and I provided a great deal of supportive evidence in our book, 13 Bankers..”

    Clearly, Johnson is trying to sell more copies of his book at the expense of weakening the US banks.

    I would not be surprised if he is an agent of a European bank absolutely hell bent on destroying the US financial system by refering to his tome of Garbage.

    Is there any way to impeach a tenured prof at MIT?

  5. (1)

    Wednesday, November 3, 2010
    Another Nobel Economist Says We Have to Prosecute Fraud Or Else the Economy Won’t Recover

    “As economists such as William Black and James Galbraith have repeatedly said, we cannot solve the economic crisis unless we throw the criminals who committed fraud in jail.

    And Nobel prize winning economist George Akerlof has demonstrated that failure to punish white collar criminals – and instead bailing them out- creates incentives for more economic crimes and further destruction of the economy in the future. See this, this and this.

    Nobel prize winning economist Joseph Stiglitz just agreed. As Stiglitz told Yahoo’s Daily Finance on October 20th:

    This is a really important point to understand from the point of view of our society. The legal system is supposed to be the codification of our norms and beliefs, things that we need to make our system work.”

    Sunday, November 7, 2010
    Guest Post: Even Greenspan Admits that Moral Hazard and Fraud are the Main Problems

    → Washington’s Blog

    Even Alan Greenspan is confirming what William Black, James Galbraith, Joseph Stiglitz, George Akerlof and many other economists and financial experts have been saying for a long time: the economy cannot recover if fraud is not prosecuted and if the big banks know that government will bail them out every time they get in trouble.

    Specifically, Greenspan said today in a panel discussion at a Fed conference in Jekyll Island, Georgia (where the plans to form the Fed were originally hatched):

    Banks operated with less capital because of an assumption they would be rescued by the government, he said. Lehman Brothers Holdings Inc. wouldn’t have failed with adequate capital, he said. “Rampant fraud” was also an issue, he said.

    Lack of Trust

    “Fraud creates very considerable instability in competitive markets,” Greenspan said. “If you cannot trust your counterparties, it would not work.”

  6. Well said! My eyes well up when I hear people speaking the truth in the face of adversity. You, Mr. Johnson, are one of my heroes :-)

  7. (1)
    This is an accessible link to George Akerlof’s 1993 comprehensive study & expose of LOOTING



    Full text of “Inside job : the looting of America’s savings …
    Inside job : the looting of America’s savings and loans / Stephen Pizzo, Mary Fricker, and Paul Muolo. p. cm. Bibliography; p. Includes index. … – Similar

  8. If there is something this crisis should have made evident to anyone like a Simon Johnson who did not see it coming, that should be the dangers of having global financial regulators trying to micro-manage the banks of the world by imposing arbitrary capital requirements on banks, and which in this case discriminated based on perceived risk of default… as if these risk were not already considered by the markets… as if the risk of default of their clients is the only risk our banks functioning represents to society.

    Simon Johnson does yet not see it, either because he is incapable of doing so, or because he serves another agenda which is not benefitted from questioning the regulators.

    Simon Johnson ends his comment with a “We need a real firewall between custodian banks and the funds with which they are connected in any form”. There is nothing wrong with that but, if our banking system really needs a firewall, that it is between our banks and the outright stupid regulators of the Basel Committee (gene donors of the Financial Stability Board) and who authorized the banks to leverage 62.5 to 1 when lending to clients who´d managed to obtain (or hustle up) a triple-A rating; and even allowed banks to lend to triple-A rated sovereign governments with no capital at all… all while if the banks lend to their most natural clients of the banks, the small businesses or entrepreneurs they need to put up 8 percent in capital.

    The most dangerous facet of the current capital requirements is not whether they are too high or too low… but the fact that they arbitrarily discriminate. And now Simon Johnson and others too, having seen how regulatory discrimination among clients failed, want the regulators to start discriminating among the assets… without given it the slightest thought to what that would imply.

    For each post that I read I am getting more and more convinced of that Simon Johnson deserves to wear a cone of shame just as much as all the Basel Committee individual members.

  9. And, Simon, let the Global Plutocratic Games begin!! I completely agree with both your analysis and commentary. You are looking at the matter as clear-eyed as is possible. Guys like Bachus view their job as empowering US banking in the global world. This is quite a farcical idea, considering that our biggest banks are heavily represented internationally (this relating to the lack of cross-border regulatory authority), and the leading cooperative plutocrats in most other nations of note are working very hard to do exactly the same thing. As a result, we have a formula for global meltdown once the banks fully subsume (if this isn’t true yet, which it may be) the ability of the worlds’ governments to rein them in. I don’t expect your cogency to make a dent in what happens on Capitol Hill relating to one of the few parts of the financial reforms to have any real meaning. The bill is weak and flawed ab initio, and the larger problem is the our regulatory structure is heavily captured. Regardless of what happens in Congress to the Vollker Rule, it is likely that the idea of “trust and verify” will largely go unheaded, and so we are on the true road to financial and fiscal hell. In the end, the whole matter is too complex to attract any voter feedback, since most of the electorate only pays attention to the appearacne of the financial lawn without being able to distinguish the weeds from the grass, and if you ask them to look more closely they can’t. Their eyes glaze over and they go back to watching the distractions provided by our media oligarchs. Sadly, this matter will not appear on any news channel, and, if it accidentally does, the commentary on its effect and meaning will be bantered about by a bunch of plutocratic shills. Same day, different feces.

  10. I do indeed think that those who structured a system of capital requirements for the banks based solely on perceived risk of defaults, and with that caused the returns on equity for the banks from lending to or investing in triple-A rated clients to be multiplied by 5 when compared to the returns bank could obtain from lending to a small businesses, and those who said not a word against that lunacy should, as a bare minimum, be made to wear a cone of shame… (and expelled from regulating ever more)…Do you suggest they should get a bonus?

  11. This Fed “Cure” Won’t Work Either, Burry Says

    11/07/2010 – Bloomberg News – excerpts

    “Michael Burry, the former hedge-fund manager who predicted the housing market’s plunge, said Federal Reserve Chairman Ben Bernanke is trying to use “poison as the cure” by pumping more cash into the economy to spur growth.

    Bernanke’s Fed pledged last week to use $600 billion in additional Treasury purchases to help lower a 9.6 percent unemployment rate, close to a 26-year high, and to avert deflation.

    The attempt to bolster growth is reminiscent of Alan Greenspan’s actions to revive the economy after 2001, Burry said in a telephone interview from Cupertino, Calif. The former Fed chairman helped create an unsustainable boom in U.S. property prices with his policies, leading to the worst global financial crisis since the Great Depression, he said.

    Boosting the economy “was the point of inflating the housing bubble,” Burry said. “It was the intent that the house would become the ATM machine, and help us through those rough times, post- dot-com, Enron, WorldCom, Iraq and 9/11.

    “That’s why I say they’re using the poison as the cure.”

    While it would damage the economy in the short-term, Burry said, he would focus on curbing government spending to prevent harsher measures later.

    “It was the problem with the housing bubble: When do you prick it? The earlier you pricked it, the better it would have been for all of us,” he said.”

  12. August 23, 2006 the Financial Times published the following letter I sent them

    Long-term benefits of a hard landing

    Sir, While you correctly argue (“Hard edge of a soft landing for housing”, August 19,) that “even if gradual, a global housing slowdown would be painful” you do not really dare to put forward the hard truth that the gradualism of it all could create the most accumulated pain.

    Why not try to go for a big immediate adjustment and get it over with? Yes, a collapse would ensue and we have to help the sufferer, but the morning after perhaps we could all breathe more easily and perhaps all those who, in the current housing boom could not afford to jump on the bandwagon, would then be able to do so, and take us on a new ride, towards a new housing boom in a couple of decades.

    This is what the circle of life is all about and all the recent dabbling in topics such as debt sustainability just ignores the value of pruning or even, when urgently needed, of a timely amputation.

  13. Man, let’s face it, the day former treasury secretary Hank Paulson slipped $13 billion to his buddies at Goldman Sachs and not one spineless jellyfish in Congress said so much as Boo, is the day we became a kleptocracy.

    Don’t expect any rational legislation from Congress. The whole institution has become one giant fraud.

  14. Per… Your perspective is old propaganda for a crony agenda of asset seizure and capital capture:

    Obama’s Biggest Mistake: Selling Out to the Bankers

    The original sin of Obama’s presidency was to trust bank-friendly economists and Bush carryovers, whose primary goal was to protect their own past decisions and futures.READ MORE

    James K. Galbraith / New Deal 2.0

  15. I see you prefer bailing out the banks and investors with the QEs.

    Why is it that everyone wants all to became cheaper to buy except for houses?

    Why do they complain so much about goldbugs when there are so many housebugs?

  16. John Smith wrote:

    “Man, let’s face it…jellyfish in Congress….we became a kleptocracy…Don’t expect any rational legislation from Congress. The whole institution has become one giant fraud…”

    Did Animals Sense Tsunami Was Coming?

    January 4, 2005 – National Geographic News

    “The beach was one of the worst hit areas of the 500-square-mile (1,300-square-kilometer) wildlife reserve, which is home to a variety of animals, including elephants, leopards, and 130 species of birds…

    Corea did not see any animal carcasses nor did the park personnel know of any, other than two water buffalos that had died, he said.

    Along India’s Cuddalore coast, where thousands of people perished, the Indo-Asian News service reported that buffaloes, goats, and dogs were found unharmed…”


  17. HEDGE FUNDS data and proposed (previously) regulation:

    (current): (quoted text):

    Estimates of industry size vary widely due to the absence of central statistics, the lack of an agreed definition of hedge funds and the rapid growth of the industry. As a general indicator of scale, the industry may have managed around $2.5 trillion at its peak in the summer of 2008. ….Recent estimates suggest that hedge funds have more than $2 trillion in AUM.[4] A recent survey of hedge fund administrators indicates single manager hedge funds have over $2.5 trillion in assets under administration ($AuA)[5]

    Largest hedge fund managers

    The 25 largest hedge fund managers had $519.7 billion in assets under management as of December 31, 2009. The largest manager is JP Morgan Chase ($53.5 billion) followed by Bridgewater Associates ($43.6 billion), Paulson & Co. ($32 billion), Brevan Howard ($27 billion), and Soros Fund Management ($27 billion).[6]
    Proposed U.S. regulation

    Hedge funds are exempt from regulation in the United States. Several bills have been introduced in the 110th Congress (2007–08), however, relating to such funds. Among them are:

    * S. 681, a bill to restrict the use of offshore tax havens and abusive tax shelters to inappropriately avoid Federal taxation;
    * H.R. 3417, which would establish a Commission on the Tax Treatment of Hedge Funds and Private Equity to investigate imposing regulations;
    * S. 1402, a bill to amend the Investment Advisors Act of 1940, with respect to the exemption to registration requirements for hedge funds; and
    * S. 1624, a bill to amend the Internal Revenue Code of 1986 to provide that the exception from the treatment of publicly traded partnerships as corporations for partnerships with passive-type income shall not apply to partnerships directly or indirectly deriving income from providing investment adviser and related asset management services.
    * S. 3268, a bill to amend the Commodity Exchange Act to prevent excessive price speculation with respect to energy commodities. The bill would give the federal regulator of futures markets the resources to detect, prevent, and punish price manipulation and excessive speculation.

    None of the bills has received serious consideration yet.


  18. The following is not a rhetorical question: When is the last time that federal regulators followed Simon Johnson’s advice on any significant and controversial issue regarding the biggest financial institutions?

  19. Milton Friedman “DEFENDING GREED AS A SYSTEM OF ECONOMIC EFFICIENCY” in an old clip from 1979 / Phil Donahue interview.

    Perhaps disturbingly fascinating, the Google search page airs this moment with open commentaries that claim the passage totally browbeat Donahue into submission with this absolutely malicious and self-aggrandizing distortion of historic revisionism. GREED IS GOOD comes back to haunt us on Wall Street but here is the devil’s apprentice himself laying it on the table in 1979.

  20. Bruce W

    If I may, these bills are not intended to become law. Their purpose is to secure additional funding for the political party (singular) currently impowered.

    It matters not who or from what end of the party these bills came from.
    Incentivizing contributors to pay their dues in a timely manner is all that matters inside the beltway.

    As for Mr Volker’s rule, the party passed it around then left it sitting in a cloak room of the Congress next to Mr. Nixon’s hat. A fine American hat, which I’m sure as with the rule, will be missed.

  21. Interesting. The conventional wisdom is that this industry cannot be regulated, and for many reasons. Practical, economic and political. So it is bad policy to come up with something as complicated as the new regulatory approach.

    Politicians do not want to do the only obviously “safe” (for the taxpayers thing (there may be quite a few second order effects that the taxpayer may not like of course) thing, which is to let “insured” firms do only things that are risk free, and let them pay for the licence to do so (the only thinks I can think of are the domestic and international payments systems). Anything else, from commercial lending to gambling via complex structures (or duping the gullible into doing so) should be part of the uninsured private sector. And taxpayers should be educated that bailing out these uninsured firms is a sin. Of course credit from unsecured lenders would be more expensive and probably more pro-cyclical. But uninsured deposits might be more attractive and making informed choices (the market would drive disclosure) would be rewarded. It would not be too hard to address the resulting market failures individually. Rather than having these abominable free riders on the loose again…How many people are aware that the form of banking practised in the US since the relaxation of Glass Steagall is a direct descendant from the Prussian financial system?

  22. “In the end, the whole matter is too complex to attract any voter feedback, since most of the electorate only pays attention to the appearacne of the financial lawn without being able to distinguish the weeds from the grass, and if you ask them to look more closely they can’t. Their eyes glaze over and they go back to watching the distractions provided by our media oligarchs. Sadly, this matter will not appear on any news channel, and, if it accidentally does, the commentary on its effect and meaning will be bantered about by a bunch of plutocratic shills. Same day, different feces.”

    I love a good freudian slip – “feces” for “faces”?


    Laughed without measure at a TV clip from New Delhi India about the wild roaming monkeys who have taken over the lawns and gardens of that city’s government district (only available “open space” in such a crowded city).

    The information was presented in a classic just-the-facts-ma’am manner by a proper old school Brit journalist with a straight face. I could never have read that piece straight – Monty Python writers would not have had to change a word :-)

    Upon additional reflection, what a chaotic mixture of “beliefs” emerging markets operate in!

    But the bottom line is still all about “animal spirits” – those monkeys were expert terrorizers of the governing class that had to get through their gauntlet to get to their offices.

    PETA needs to watch that clip. So does Washington DC.

    Free-market capitalism is a belief held alongside the belief in the sacred monkey….

  23. With respect to the need of simplicity of regulations, below what I told a large number of regulators at a workshop on risk-management at the World Bank in May 2003 when Basel II was still, supposedly, being discussed.

    “let me start by sincerely congratulating everyone for the quality of this seminar. It has been a very formative and stimulating exercise, and we can already begin to see how Basel II is forcing bank regulators to make a real professional quantum leap. As I see it, you will have a lot of homework in the next years, brushing up on your calculus—almost a career change.”

    Of course most of bank regulators have no understanding of the regulations, especially since we can see that those who designed them did not know what they were doing either.

  24. Would you guys please weigh in on the QE debate and how it relates to commodity prices and the dollar. Read Kevin Warsh and Fisher’s speaches from yesterday.

    Where is Bernanke taking us?

  25. Re: @ Per Kurowski___”brushing up on your calculus-almost a career change”…brilliant! Ref: “The Application of the `LaPlace Transform` to certain Economic Problems” (dated material past 30 yrs.)…inferring, “Stochastic as well as for Deterministic Economic Processes”. PS. What we have is an excellent subject matter that Mr. Stephen A. Boyko (author – “Were All Screwed”) and chartist contributer, Mr. James Gornick – could chime in on with their empirical knowledge.

  26. Off Topic – BaselineScenario has gone from #10 (Sept/2010)…”Wikio Business Blog Ratings” falling to #13 (Oct/2010), and now tumbling to #18 (Nov/2010) with Krugman still holding the #1 “Spot” ? Let’s go get some eyeballs guys! :-0 PS. For God’s Sake, “Krugman” ???

  27. Re: @ Bruce E. Woyce___Excellent article, Thankyou :-)

    I did a cummulative study of inflation regarding annual compound interest from the year 1915/1957/2011 with parameters set at 2%__4%__6% respectively and the results (Start/Midterm/Finish) are as follows:

    1915___2%/4%/6%___1957 2%/4%/6%___2011 2%/4%/6%

    PS. Bernanke wants inflation at 2% ??? and the mean average for the american laborer lies somewhere between 4.25% – 4.75% IMHO. Thanks again Bruce

  28. @Bruce
    Thanks for the link to Ms Smith’s interview by TRNN.
    I watched Pts 1 & 2. Ms Smith makes an excellent point, as have many others, pertaining to senior gov officials ( this includes regulators).

    I wholeheartedly agree. She posits that far too many senior gov officials are basically “punching their tickets” while in public service to really get to the gravy train of becoming a lobbyist, a consultant and/or board members post-gov service. The “revolving door” between beltline insiders and the financial world remains a tremendous impediment to ANY effective financial/economic reform.

    Despite my continued keen interest in following economic policy formation and the regulatory process, in my heart-of-hearts, I remain highly skeptical of palpable improvement because of the seemingly impossible-to- stop revolving door and personal profit motivations.

    I certainly don’t believe all those in public service are in it for the “afterlife”. However, I do believe there has been a consistent transfer of motivation within the public service sector over the past two decades, particularly at the senior level, that significantly undermines real progress.

    Although many others have presented a similar scenario, I feel Ms Smith’s succinct assessment captures the big picture “in a nutshell”.

  29. If the baby you refer to is allowing a group of self-appointed-mutually-admiring-experts to be able to hole up in a Basel Committee and uncontested and unaccountable impose their own petty criteria about risk on the world… I would definitely say “make sure you throw out the baby too!”

    Now with respect to the bathwater that seems to be kept and recycled by the Fed with their QEs.

    I wonder, does Simon Johnson or anyone of you ever read what the Basel Committee is up to?

    Though the market discriminates for risks by way of the interest rates these bank regulators placed an additional arbitrary layer of discrimination on risks, which increased the incentives for the banks to stay away from small businesses and entrepreneurs and concentrate their portfolios more in sovereign lending and triple-A rated operations. And now the response to the failure is not eliminating the discrimination but searching for ways to make that odious discrimination more precise and supposedly objective.

  30. There is a good video on TRRN (last week) concerning this $600B issue ( The Real News interviewing PERI @ Amhearst/ Mass.) You should be able to find it from the link with Ives Smith.
    The co-director of PERI said that the big difference here is that the 600B will be buying “LONG TERM” treasuries rather than short term (which apparently is fairly routine and hasn’t really raised any powerful eyebrows.
    This raises some question about allocation and alarmist procedures going on that we don’t understand. The anticipation is that the Republicans will now shut down the QE processing …so the big hullabaloo over inflation is somewhat political leverage (rear guard in motion…) to begin a rhetorical power play. Of course the reversal will constrict the “domestic” surge that has become the anthem for infrastructural recovery and is (supposed to be the, all too late, target of the “pump”) about to be grounded to a halt by neo-conservative “austerity” imploding on the American domestic economy.
    Oddly or not, much of the arguments that are being popularized by this one current announcement should have been major issues when the money was pumped into the banks in the first place. But the way I assess it this wasn’t the focus because it would demand some tracking and accountability that the banks were not interested in surrendering. Perhaps an oversight committee that knew what they were doing might have directed the entire TARP process more efficiently. But again, the issue of control and ownership was on the line, let alone the question of whose AGENDA the money was truly servicing (public or private).

    It may well be that the “so called” lack of “liquidity” to the real economy was, in part, a recognition that it would be inflationary risk, but it is more likely that the agenda for political finance is both a exit plan (escape route) from the past and a “capture” of the near and far future for our domestic economy. Now instead, the money is at the top and the bottom will begin to squirm. Gradual “squeezing” will compliment their “easing.”The Domestic economy is simply the conduit to power and we are all essentially expendable.
    I call it “qualitative & quantitative squeezing” (yes folks…you heard it here first!). They got the pump…we got the dump!

  31. @ Per___”read what the Basel Committee is up to”

    “Burning the Book of Repugnancy”

    “everytime I read the same book over and over I come away with a different purport…why is that – oh…to go back to the first read brings such innocence from the interminably past poisoned by cynicism morrows”

  32. Thank You Cedar (in return…and in kind).

    It seems to me that the upcoming generations have been hoodwinked and programed with “loaded language” corrupted ideologies and political conformity proscribed rhetorically as consensus. I like William Black’s statement that we have essentially been conditioned to see everything as a “system capacity failure” which makes us prone to see reform as a corrective process. It does not dqwn on honest people that perhaps there is more than one system working; and one of them is simply power and command over resources and productive capacity as a political Industrial system. Niehbor (sp?) wrote a book entitled “Slavery as an industrial System” back circa 1908. Today, it is transposing as “Privatized Capitalism in the New Ownership Society.”

    America believes it is impregnable and immune from what has been the power/force relations of a global expansion because it has been slightly buffered for a couple hundred years by Ocean barriers. These are essentially gone right now and it is clearly NOT THE END OF HISTORY. This too is pure narrative propaganda.

    What we have going for us is the internet. I have been personally discouraged at times to see that real learning and information seems to be no match for the power manipulations of our time. These include market entrapments, perverted rationalizations, media control and capture of “the narrative” and the general emotive sway of real Americans by political marketing as SWARM (right out of RAND think tank processing into the mainstream of demagoguery). Basically we have only an unpaid demographic of idealists that are attempting to communicate and educate each other. This has been what Simon Johnson and James Kwak have facilitated for us, but this too will be cut off and dominated by “ownership” and corporate entities staking claim over intellectual (information) property rights in the near phase of this conquest of American individualism…in the name of American individualism! We are being subdued slowly but surely by Corporate governance and civil compliance. We are being asked to react…not to question it. The “Regulatory Republic” are all the same guys…

    So here we stand at a time where real education is a debt load that captures careers through brokerage loans and commitments that create bounded choices we are still calling freedom. They are selling us the right to our lives.

    But here to we stand together in a classroom of our own making and taking. The one thing this “crisis” has produced is a brief period of mutual awakening. We have taken the hoods from our own eyes, but eagle or hawk we will have to decide which way to fly.

    Sorry if this sounds like a sermonettet it is that or feeling like a marionette!

    Here’s some great background links for you review and for your e-file references. Thanks to everyone at this post…there has been some very serious dialogue and sharing going on here.



    (3 a & b)





  33. Just the other night, Kudlow licked his chops in goldilocks glee about the “15-20 minutes” it will take to suck up the whole 600 B QE…they’re so delusional, they no longer try to doublespeak or use “shorthand” like “QE”…

    115-20 minutes to suck it all up – that’s the e-hose virtual “inwestment” in computer “technology”…

    Constitutional Convention and BURN The Patriot Act – that’ll take care of the “deficit”…

  34. Re: @ Bruce E. Woych___”The Military Complex Machine”, the “5th Rail” in America, and the “Subsequent Loss of Life if Touched”? Take a gander at the revolving door, and the $Trillions made by those “Profiteer’s from War”! (Guns for Butter sounds more like the old USSR than America?) The “Council on Foreign Relations” [(CFR)(Traking the Whole World)] works closely with the IMF, World Bank, ISI, and Basel I $ II in strange ways:


    “India was once a Russian bailiwick when it came to arms sales, but no longer. So the president arrived with a Boeing deal to sell C-17 transport planes to the Indian military for up to $5.8 billion (and so, supposedly, create 22,000 new American jobs). A “preliminary agreement” was inked on this trip, while the two countries agreed on a counterterrorism security initiative, and the U.S. lifted certain export controls on dual-use technology as well.”

    full article

    Plus a 60 Billion deal with Saudi Arabia…(you will have to google it, they would not let me post the links here).

  36. Selling the National Security State (of the art!) or High Roller Arms Dealing? You decide.

  37. earle.florida
    Descent Theory: They say it isn’t really a factor in contemporary society. Check this out (along with some other gems of awareness here):

    “Decades of largess has allowed the Al-Saud family to expand to over 20,000 members with the typical male having anywhere between 10 and 40 children each. This means that allowances have dropped down to the range of $10,000 to $15,000 a month for the average prince. While this is certainly huge by normal standards it is not enough maintain a leer jet and the general lifestyle that many Saudi royals feel is their birthright. As a result, many in the Al-Saud family have had to resort to more nefarious ways of making money. Typically this activity comes in the form of “commissions” that they receive from foreign companies in exchange for the Saudi government granting them business contracts.” FULL ARTICLE:
    Following the Money in US – Saudi ARMs Deals by Jeremy White (Huffington Post)

    Originally Posted on Demagogues and Dictators

    (PS: are you having trouble getting posted?)

  38. Sorry…have to plug in “Clinton Body Count” in search window. PS. Bill Clinton is a puppet for the Rothschild Family, and as a sidenote helped house “Oli North” [Iran/Contra/Ronny Reagan – (trust and verify while asleep?) impeachment?] in the Arkansaw Mansion when he (Oli the Shedder) was a hot item! Go figure…

  39. earle…after reading
    Blinded by the Right: The Conscience of an Ex-Conservative by David Brock it is hard to believe any of the murder inferences made by his enemies. The story Brock tells is pretty convincing because he was directly involved in creating them.

    On the other hand Clinton certainly crossed many lines and played both sides against the middle better than the Republicans themselves. In retrospect Clinton followed the policies as Bush with one possible redemption: He paid down the debt that was supposed to be impossible.

    I am more interested in trying to determine what President Obama is “trapped” in that is motivating his politics. Something is just not right; and all we get is what’s “left!”

  40. @ Bruce___Clinton never lowered the Nat’l Debt but kept our balance of trade positive. Why? He had the immediate fruits of NAFTA working for him when first implemented…thus while China, South America, and others were on the positive side of the U.S. balance trade ledger building up their (foreignor’s) infrastructure (very similar to post WWII reconstruction with time constraints applicable) temporarily at our questionable, and immediate beneficial expense. But like everything big MNC’s – American Business endevor…it’s only temporarily soon to run its deceptive course, and the rats have abandoned ship long, long before the misdeeds are even realized by the gullible public! Obama isn’t trapped – he’s done his deeds???

  41. @ Bruce___We’ve sold out our manufacturing/industrial base,…so what makes the military industrial base inexpendable? Think about it? The only thing keeping America safe from invasion is our “Superior Nuclear Submarine Arsenal, and Technology” that is failsafe from cyber attacks. Physics baby…pure physics and German knowhow. Danke ;-)

  42. Well Earle…it looks like this stream is packed with some really fascinating links for anyone who would like to truly get a full dose of realities; so on your lead concerning this last reply: Weapon systems as export.

    The pentagon economic drain falls into this same pattern of using public funds to create private wealth. The bankrupting of the economy process is part and parcel of the overall strategic incentive under Bush, but the conversion in this sector is part of creating obsolete systems to sell as a secondary “after market” dumping ground to the “developing” world. The priority of “upgrading” necessarily mandates new financing from the US Gov (public) to stay ahead of the systems we sell. Selling “national security” systems around the world is a massive enterprise.
    $1.2Trillion Global of which nearly half was USA in 2006 ($529B). (interesting overview; see charts)

    The ever popular BLACKWATER employs former Pentagon and intelligence community
    officials (Rothkopf 2008:212) and Singer (2003;2008 update) has extensively documented that “privatized” military service is one of the very few truly “globalized” corporations that extend professional “corporate” military capability to the highest bidder (even a single wealthy individual). Singer suggests that NGOs may setup a global dynamic beyond the state dominated controls, and operate somewhat like the “charter ventures” of the 19th century (2008:34-36;82-85). He states:
    In sum, although a near explosion in the extent and range of
    privatized military activity has occurred around the globe, analysis
    has not kept pace. The theorized system of hard “billiard ball”
    states may gradually be replaced by a multilayered international
    order resembling that of previous eras (Singer 2008:190).
    The empowerment of NGOs by privatized military forces (PMFs) has been excellerating since the turn of the century in what has come to be termed “security-led investment (Ibid:188)”.

    Singer does touch upon the fact that the finance system is the determining market factor as to how these alliances will all coordinate, but he has a focus specifically on the development of these PMFs and how they appear to be rationally deployed. He even recognizes that the Arab financiers have an affinity for utilizing ($$$) market mercenaries. He never recognizes the actual transitions emerging in the political economy, since he tends to keep the “traders and merchants of business” separate from the governments of polity or the politico-military consolidated forces of the states.
    Juhasz (2006), meanwhile, does see how the political economy is being manipulated as a direct merger between state and corporations; and the keys to the kingdom is control of revenue through the epicenter of international finance.

    Books cited: Rothkopf, David 2008 SUPERCLASS: The Global Power Elite The
    World They Are Making. Farrar, Straus and Giroux; NY

    Singer, PW (2008) CORPORATE WARRIORS: The Rise of the Privatized
    Military Industry. “Updated Edition” Cornell U. Press; Ithaca

    Juhasz, Antonia (2006) The BUSH AGENDA: Invading the World, One
    Economy at a Time. Regan Books: Harper/Collins; NY

  43. One more point Earle… Considering the fact that we have quantitative easing fueling the financial sector (class structured restraint: no liquidity to dredit in the commercial or infrastructure that does not serve the stratified essentials)…

    and now we have international returns being fed…where?
    …directly into one specific and selected market sphere; eg: the military industry production markets…and what do we end up with between a war machine and a financial market? Well we end up with an economy built around the “trickle down” essential needs of that sector. Production priorities will follow the money supply.

    So where does that place the rest of us? The priority for an infrastructure to support a lower and middle class American economy based upon subsistence and standards of living simply is not being targeted. It is Nowhere and expendable!

  44. @ Bruce___GM, Chrysler, and even Ford are expendable but when is the last time you heard of a Lockheed Martin, Boeing, Raytheon, Northrup Grumman,etc.,etc.,…the Ship Builders…[(Newport News)(Electric Boat)etc., etc.,] “Military Complex Machinery Component” going under? PS. Russia, and China make many comparible weapons to America’s “State of the Art” weaponry. In fact their fighter jets and helicopters…especially Russian helicopters are a hot item bought and paid for by our defense department being deployed in Afghanistan. Wonderful? The U.S. has been expanding missle defense in the Gulf for years…Ref:___(some must be googled…eg. “U.S. expanding missle defense in Gulf”/ “Chinese nuclear submarine base”)

  45. I just happened to have this handy for just such an occasion… (it stil says it all …Proudly & unquestionably patriotic):

    Full Speech here):

    Click to access Farewell_Address.pdf

    January 17, 1961 ( Excerpt): Eisenhower’s Presidential Farewell Speech

    “Our military organization today bears little relation to that known by any of my predecessors in
    peacetime, or indeed by the fighting men of World War II or Korea.
    Until the latest of our world conflicts, the United States had no armaments industry. American
    makers of plowshares could, with time and as required, make swords as well. But now we can no
    longer risk emergency improvisation of national defense; we have been compelled to create a
    permanent armaments industry of vast proportions. Added to this, three and a half million men
    and women are directly engaged in the defense establishment. We annually spend on military
    security more than the net income of all United States corporations.
    This conjunction of an immense military establishment and a large arms industry is new in the
    American experience. The total influence-economic, political, even spiritual–is felt in every city,
    every State house, every office of the Federal government. We recognize the imperative need for
    this development. Yet we must not fail to comprehend its grave implications. Our toil, resources
    and livelihood are all involved; so is the very structure of our society.
    In the councils of government, we must guard against the acquisition of unwarranted influence,
    whether sought or unsought, by the military-industrial complex. The potential for the disastrous
    rise of misplaced power exists and will persist.
    We must never let the weight of this combination endanger our liberties or democratic processes.
    We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the
    proper meshing of the huge industrial and military machinery of defense with our peaceful
    methods and goals, so that security and liberty may prosper together.
    Akin to, and largely responsible for the sweeping changes in our industrial-military posture, has
    been the technological revolution during recent decades.
    In this revolution, research has become central; it also becomes more formalized, complex, and
    costly. A steadily increasing share is conducted for, by, or at the direction of, the Federal
    Today, the solitary inventor, tinkering in his shop, has been overshadowed by task forces of
    scientists in laboratories and testing fields. In the same fashion, the free university, historically
    the fountainhead of free ideas and scientific discovery, has experienced a revolution in the
    conduct of research. Partly because of the huge costs involved, a government contract becomes
    virtually a substitute for intellectual curiosity. For every old blackboard there are now hundreds
    of new electronic computers.
    The prospect of domination of the nation’s scholars by Federal employment, project allocations,
    and the power of money is ever present–and is gravely to be regarded.
    Yet, in holding scientific research and discovery in respect, as we should, we must also be alert
    to the equal and opposite danger that public policy could itself become the captive of a scientific-technological
    It is the task of statesmanship to mold, to balance, and to integrate these and other forces, new
    and old, within the principles of our democratic system–ever aiming toward the supreme goals
    of our free society.”

  46. Three thoughts on The Volcker Rule:
    1. Should we bring back Glass-Steagall instead of, or, in combination with, the Volcker Rule?
    2. Does the current emphasis on high frequency trading have an impact on The Volcker Rule?
    3. Is there something to be lerned from agriculture products? What I am thinking of here is from experience at the beginning of my career with a grain exporter more than 25 years ago. I hope that I am remembering the details correctly.

    For agricultural commodities, such as corn, the buyer, at his/her discretion could pay for grain to be re-graded at the time of delivery. Perhaps what is needed in financial trading markets, is to regard the sliced and diced bundle of, for example, mortgages, to be subject to “re-grading” before a counter party would accept them.
    I know that there is a lot of complexity here. But the point is that, at some point with every one of these resold, sliced and diced mortgages, someone was in a position to know the quality of a loan: borrower credit history, borrower equity in the property, borrower’s assets vs. liabilities vs. external cash flow. Many sub-prime loans were toxic when the loan papers were signed. They were metaphoridal cowpies, aka b*llsh*t. In the process of trading, slicing and dicing them, they were painted over and made to look like gold.

    Just my 2 cents.

  47. I’ve got very bad news for you. Johnson and Kwak could never sell another copy of their book and it wouldn’t mean squat. Lots of banks would still be staring at us from below sea-level. The walking dead put themselves there and there they will stay until mercifully put to rest.

    That’s what should have happened from the get-go. Their own greed, arrogance, and stupidity put them under due in no small part to the criminal enterprise that was liar’s-loan securitization and the financial thugs in the swaps market that hedged against the very instruments they were touting and stuffing into bank portfolios.

    Hundreds of banks have been in the drink since this the grim-reaper of CDOs crashed the party in 2007-2008.

    On the presumption that members of the House and Senate regularly read to inform themselves – something I’ve come to doubt – they’d all benefit from picking up 13 Bankers. They might even try implementing some of the recommendations to see if they actually work. That hasn’t happened yet so your claims about its influence don’t hold any water.

  48. Perhaps there’s symmetry here since those doing the risk-management don’t have any basis for their risk estimates. They have no understanding of the securitization appliance they built. It’s not amenable to probabilistic analysis over its full range of behaviors. This isn’t about statistics and never has been. It’s about non-linear dynamics, state spaces, strange attractors and stable versus unstable trajectories in those state spaces. The models don’t work once the system transitions.

    As a bonus, the quants who dreamed this up and their handlers who packaged and sold this crap never bothered to track any of the trash they stuffed into these “investments”. That might have helped once they realized that the Gaussian copula was useless. They could at least have rooted out the poison. They weren’t able to do that because no one knows, probably to this day, which portion of which mortgage went into which tranche of which investment.

    Three choices: they’re either lazy, incompetent, or they’re criminals. I lean towards the latter. It’s time to prosecute.

  49. Bernanke is interested in where he’s taking us only as a peripheral concern to the real question for the Fed: where can he take the banks. He’d like to drag them out of the hole they dug themselves with this bond buyback. It’s all about making it even more convenient for the banks to make huge profits by getting as much free money into their hands as possible.

    If you go back a few weeks, there were links and videos posted about the situation for some of the biggest players. In a nutshell, Chris Whalen of Institutional Risk Analytics figures B of A and Wells Fargo will have to be re-structured quite soon. They’re almost to the point where it takes them more than a dollar to make a dollar, thanks to their inability to deal with the mortgages that are reverting back to them.

    Since this fiasco started, their preference has always been for foreclosure since they’re often hedged against that (Note: taxpayers eat it there as well since we’ve had to re-float that business). But the courts are now intervening, forcing banks to produce documents they should but in many cases don’t have. They won’t make it if they can’t keep foreclosing and stiffing mortgage holders. It’s very perverse.

    The bond buyback is a way to let the bankers stuff their cheap money into places like Brazil where they can get great interest rates. Naturally Brazil doesn’t like that since it threatens to inflate assets in their country, promising a collapse when that money drains off to another place. That’s what the argument at the G20’s been all about.

    As for commodity prices, they’ve been dropping of late.

  50. Norm: Nice direct answer and I think you know that is only the tip of the iceberg. There’s a G20 post now from Simon Johnson (actually there are three in a row that are related). You might want to check that out.
    You can click on the “BASELINE SCENARIO” heading at the top of each article to access the stream/index if you didn’t get to see these yet.

    Regards: Bruce

  51. I just think them humans… though I would like to prosecute them and condemn them to parade down 5th Avenue doning huge cones of shames and to never ever have something to do with regulations. If we can not set an example out of these how can we expect regulators to improve

  52. The banks and their hedgers have no idea what they built, and the regulators have no idea what it is they’re regulating. There’s some poetic justice buried in there somewhere.

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