Today we have the vote finally to implement the long delayed “Volcker Rule” to reign in proprietary
double-dealing trading at big banks. The wording just last week morphed into a tougher stance with an outright ban on the nebulous “portfolio hedging” category that has come to encompass all manner of speculating at the taxpayer’s peril. See: Volcker trims the banking hedge. Last night wording was apparently watered down again at the financial lobby’s relentless behest to an allowance for prop trading but a restriction that bonus compensation not be directly tied to it. The bank lobby says the law is too strict and it won’t help to reduce systemic risk. Bank critics say that the rule is too weak and will only encourage the banks to find profitable workarounds and will therefore not reduce systemic risk.
In truth, great complexity, abuse and unintended harms have been born of the refusal (to date) to simply reinstate a division between traditional banking backed by deposit insurance/tax payers (deposits and lending) and the speculating and risk taking that should be allowed only at the financial peril of actors with their own personal skin in the game. Formal investigations have repeatedly confirmed that the implicit safety net of government backing to risk-seeking activities was a significant cause of the financial crisis of 2008 and continues to embolden investment banking conglomerates unto today.
The Volcker Rule in its present incantation is a start that will no doubt cause investment banks some frustration and loss of some profits. But the stage remains set for a further push now to enact the Glass Steagall 2.0 bill which was tabled by Senators Elizabeth Warren (D) and John McCain (R) last summer. 30 short pages of wisdom, clarity and effective policy, read their bill here for a quick reminder of the history and evolution of the rules that were implemented, repealed and are now desperately needed once more.