"The Volcker Rule Won't Work"

December 14, 2013 • 9:34AM

In an interview with Deutsche Welle, Prof. Bill Black slams the Volcker Rule and cites the urgent need for "thinking boldly" and restoring Glass-Steagall.

Black says, "[The Volcker Rule] won't work because it will be too easy to evade." Besides being too much work for understaffed regulatory agencies, "As soon as you tell the banks they can hedge, against a trillion and a half dollars worth of their portfolio, tell me you couldn't find something that would be a hedge for...It's a tragic lost opportunity for real reform. It is worse than nothing."

Deutsche Welle says Black is for much tougher measures, such as cutting banks down to size to eliminate the "too big to fail" problem that threatens to crash the whole economy, and because the "too big to fail" institutions can borrow more cheaply, which creates a huge competitive advantage. Black told DW that the Glass-Steagall Act from 1932-33 should be reinstated, and explained that it separated traditional banking from risky activities like investment banking. "It worked brilliantly for 50 years... Contrast the boldness of the U.S. response to the Great Depression and the successful boldness in regulation with the timidity of the global response to the current crisis, where we feel we can't even think boldly." Black also discussed Glass-Steagall on "The Black Report" Dec. 13 internet show on www.therealnews.com.

Thomas Hoenig, vice-chairman of the Federal Deposit Insurance Corporation (FDIC), told reporters after a speech in Dublin, Ireland, that while the Volcker Rule could be a useful step in spurring commercial lenders to split from broker-dealers, "I don't necessarily think it will stop the momentum, especially if it's successful and helps mitigate some of the surprises we've had. It may, in fact, make a very good case for carrying that forward in terms of some of the risks that are in market-making that can be gamed very easily for speculative activity." In other words, eliminating surprises could help fuel speculation. Hoenig, who was President of the Kansas City Fed before joining the government-run FDIC, has called for Glass-Steagall. "Restoring that separation could help reverse an evolution that has seen the five largest U.S. financial companies increase their share of the industry assets to 55 percent from 20 percent," Hoenig said in the speech at the Institute of International and European Affairs.

Pam Martens writes in Wall Street on Parade, in an article titled "What Dodd-Frank Didn't Fix: The Most Dangerous Aspect of Well Street," that "Each of these megabanks (Bank of America, JPMChase, Wells Fargo, and Citigroup) that together hold the bulk of the insured life savings of Americans, owns an investment bank and brokerage firm making daily speculative, highly leveraged bets on derivatives and the stock market and the futures market. The Volcker Rule cannot stop that; only the restoration of the Glass-Steagall Act can separate insured depository banking from casino gambling on Wall Street."

Christopher Calwald in a column in the Financial Times writes: "Embedded in the larger Dodd-Frank finance reform, the Volcker rule was presented to the public as the modern equivalent of the Banking Act of 1933 (known as Glass-Steagall), parts of which were recklessly repealed in 1999. But it is no such thing. It is too complex for that. Congress has done small savers and taxpayers no favours and has probably delivered a gift to the larger banks.... While the Volcker rule exposes big bankers to various regulatory sanctions, it actually shelters them from something more threatening: the kind of democratic scrutiny Glass-Steagall brought."