The new proposal waters down the so-called “Volcker Rule” (named after former Federal Reserve Chairman Paul Volcker, who proposed it). The Volcker Rule was part of the Dodd-Frank Act, passed after the near-meltdown of Wall Street a decade ago, in order to prevent future near-meltdowns.
The Volcker Rule was itself a watered-down version of the 1930s Glass-Steagall Act, enacted in response to the Great Crash of 1929. Glass-Steagall forced banks to choose between being commercial banks, taking in regular deposits and lending them out, or being investment banks that traded on their own capital.
Glass-Steagall’s key principle was to keep risky assets away from insured deposits. It worked well for more than half a century. Then Wall Street saw opportunities to make lots of money by betting on stocks, bonds and derivatives (bets on bets) — and in 1999 persuaded Bill Clinton and a Republican Congress to repeal it.
Nine years later, Wall Street had to be bailed out, and millions of Americans lost their savings, their jobs and their homes.
Why didn’t America simply reinstate Glass-Steagall after the last financial crisis? Because too much money was at stake. Wall Street was intent on keeping the door open to making bets with commercial deposits. So instead of Glass-Steagall, we got the Volcker Rule — almost 300 pages of regulatory mumbo-jumbo riddled with exemptions and loopholes.
Now, those loopholes and exemptions are about to get even bigger, until they swallow up the Volcker Rule altogether. If the latest proposal goes through, we’ll be nearly back to where we were before the crash of 2008.
Why should banks ever be permitted to use people’s bank deposits — insured by the federal government — to place risky bets on the banks’ own behalf? Bankers say the tougher regulatory standards put them at a disadvantage relative to their overseas competitors.
Baloney. Since the 2008 financial crisis, Europe has been more aggressive than the United States in clamping down on banks headquartered there.
The real reason Wall Street has spent huge sums trying to water down the Volcker Rule is that far vaster sums can be made if the rule is out of the way.
Meanwhile, the largest banks have continued to make big bets — and the proposed rule will only make the betting easier. Last year, Goldman Sachs traders lost $180 million on bad bets in natural gas markets. Meanwhile, Morgan Stanley traders made almost $400 million in bets on power and energy.
The only answer is to break up the giant banks. The Sherman Antitrust Act of 1890 was designed not only to improve economic efficiency by reducing the market power of economic giants like the railroads and oil companies but also to prevent companies from becoming so large that their political power would undermine democracy.
The sad lesson of Dodd-Frank and the Volcker Rule is that Wall Street is too powerful to allow effective regulation of it. America should have learned that lesson in 2008, as the Street brought the rest of the economy — and much of the world — to its knees.
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