Big story on the front page of the NYT. Seems as though the administration really does lovePaul Volker. No honest, they really, really do. They even teed up their head economist (who is liked by everyone by the way) to assure that not only is he loved but he is respected. The fact that no one is listening to the guy has nothing whatsoever to do with the fact that they really, really like him and really, REALLY respect him. Crap.
Mr. Volker continues to be used, this time in a very perverse manner. Ol' Paul is being portrayed as the barbarian from whom The Leader and The Suit will protect the nation's financial institutions. It seems to me to be no coincidence that on the very day The Leader flies into the Apple to hit up the Wall Street mob for $3 million, he insures that Volker gets front page AND Mr. Volker's regulatory views get front page as well. You see, Tall Paul wants to turn back the clock to the good old days of separation of investment and commercial banking as opposed to the more "modern" view espoused by The Suit and his boss...oops, Freudian slip...his colleague Larry Summers. It is no secret that there are going to be very few banking guys at The Leader's speech, they having realized that this is not really a bunch who have their best interest's at heart. "We're going for the hearts and minds here guys, let's make sure these guys know what a menace Volker is but let's do it while saying nice things about him." The fact that Volker may well be correct in both theory and practice has never entered their mind because this is about control and not about best practices.
The Leader and Co., egged on by the likes of Barney Frank would much rather address the situation through a massive regulatory structure which in the end they believe will enable to control the activities of the nation's financial institutions and direct their activities in the manner best suited to the politics of the moment. Perhaps they can, but as I have said, give me a couple of smart lawyers and five bright financial types and I'll find a way around any legislation written in 72 hours if it is worth my while to so do. Further, the more government involvement and control one has, the more the risk is that of the government (read taxpayers). Do that and one institutionalizes Too Big To Fail. The most governmental control that has existed in recent time has been over Fanny and Freddy (don't forget Ginny and the FHA). They are catastrophes. Remember The Leader crowing about the Dow Industrials reaching 10,000 the other day as a sign of success? Two days ago both Fanny and Freddy were downgraded to a SELL with an anticipated price of ZERO. The taxpayers will pay for trillions of dollars of government mismanagement. So much for pointing to the stock market for signs of success. The Leader and The Suit are about to repeat history.
What Volker is saying is simply create a situation where the most volatile risks are separated from the umbrella of the government's protection. One does not have to necessarily recreate the legislation of the 1930ies to do this. If banks such as J.P Morgan Chase wish to engage in, say, trading for one's own book, why cannot it be done through and independently capitalized subsidiary away from the deposit taking and lending function of a commercial bank? Not a rhetorical question by the way. I could use some help but brave man that I am, we'll follow up on this theme tomorrow. In the mean time, it has been my experience that Mr. Volker, crusty old bugger that he is, is usually the smartest guy in the room.
Well, I think the one thing that the crisis has shown is that regulators were unwilling to wall-off non-bank subsidiaries from the banks. It is particularly difficult question when a derivative position in, say, a bank is used to hedge a security position outside of the bank.
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