Why Not Adopt The Volcker Rule?

Quoting from President Obama's remarks on financial reform on January 22, 2010 "This economic crisis began as a financial crisis, when banks and financial institutions took huge, reckless risks in pursuit of huge profits and massive bonuses". There is not a single economistin the western world who would argue with the observation that excessive leverage was a root cause of the financial crisis. Take Bear Stearns as an example. They were leveraged 100 to one on the weekend that they failed. That meant simply that they were in a situation where they had borrowed to the max--that they had made a bet putting up all of their money so that a 1% maarket drop would result in loosing 100%. Not even the most reckless bookie in Vegas would ever do such a dumb thing. Venerable and supposedly brilliant Lehman Brothers was hardly any better or smater, failing with leverage over 80%.
What the president was saying was that the banks were playing in the same game, their trading desks in the risky game of subprime mortgages, derivatives, and credit default swaps plus gambling in the oil futures markets. They were funding hedge funds, and trading themselves like hedge funds. It is obvious that we need a limit on risk taking in the name of stability, reliability and future growth.
Now the House of Representatives has passed the necessary financial reform to curtail this risk taking under the leadership of Rep. Barney Frank and the Senate is now working to follow through under the chairmanship of Senator Dodd. It was before his Senate Banking Committee that former chaiar of the Federal Reserve, Paul Volcker testified yesterday.
Volcker appeared before the congress on February 2nd. His public testimony held that high risk trading such as hedge fund acvtivigties should not be part of standard commercial banking. Banking licenses should not be given to institutions that cause failures through extraordinary risk. Excessive leverage and inadequate capital to support liquidity should not be allowed. The idea is to have procedural safeguards that step in to cause bankruptcy rather than allowing such banks to become too big to fail.
The President's current proposal provides for an authority that would intervene and prevent excesses of proprietary trading[translate casino activities using depositors' money]. Conflicts of interest such as between bank brokerage activities and the brokerage "research" should not be allowed to provide leverage whch such an authority would limit or eliminate. Banks should not be trading for themselves and sustaining losses that undermine their stability and their central mission. Such inside funds should not be able to profit from knowledge of customer business. Attempted separation ("Chinese walls")eventually do not work. There is plenty for banks to do without going beyond commercial community needs. Commercial banking should be clearly defined and fundamentally conservative as they were meant to be. This in the end brings good competition and a stronger system.
All this was undermined by the majority leader of the committee, Senator Richard Shelby of Alabama, who appeared on CNBC Financial the same afternoon and held that we have all the regulation we need, and that the Volcker Rule was unnecessary and he would not support it. After the greatest financial disaster in more than a century, I would hope that the Senate does not follow his lead. I can only assume that Senator Shelby would allow banking firms to continue to run hedge funds and any leverage they please while running a bank backed by the US Taxpayer.
Let's adopt the Volcker Rule. Let us take the casino out of the commercial banks and never require such bailouts again.