Obama to Propose Rules to Restrict Proprietary Trading

Bloomberg reports that Obama will announce provisions to limit the proprietary trading activities of banks.

This all sounds well and good, in fact, I’ve advocated prohibiting prop trading (you’d need pretty active monitoring of overnight positions to make sure it has not simply been moved back to order flow desks). It is not a socially productive activity and has no place in firms enjoying government backstops.

But how do you “limit” prop trading in firms that have international operations? Without the famed “harmonisation” with the UK and EU, I’m curious as to how this can be implemented as to not be circumvented (the UK bonus tax fiasco is an embarrassing reminder of blood-minded the industry is about preserving its perquisites).

This is going to be very difficult to implement at this juncture, unless Team Obama has a purely regulatory solution. This should have been implemented months ago, when the banks were on the ropes and beholden to Washington. They are now emboldened and will fight tooth and nail. And the report at the Financial Times says the plan will require new legislation. Given how derivatives reform was gutted and health care reform was botched, what do you think the odds are that something with teeth will be voted in? Pretty close to zero. As the FT tells us, quoting an anonymous source:

“The proposal will include size and complexity limits specifically on proprietary trading and the White House will work closely with [the House of Representatives] and Senate to work this into legislation moving on the Hill.”

Yves here. And what, pray tell, is this about?

Goldman Sachs – which runs a large proprietary trading business and which reports results on Thursday – will be watching the details closely, but the measures are more likely to threaten institutions whose operations are large and span commercial and retail operations as well as trading for their own benefit.

Yves again. Goldman is every bit as backstopped by the government as a depositary. The idea it should get more favorable treatment is absurd.

And you have the AIG and LTCM precedents. Firms outside the regulatory cordon sanitaire were still enmeshed enough with the key international capital market players (now essential to the functioning of the global economy) that entities largely exempt from regulation put the entire financial system at risk. Unless you ALSO limit how backstopped firms are permitted to do business with risk-taking firms, you have not solved the problem, just shifted how and where it will eventually show up.

The most encouraging bit of this story is that Volcker finally seems to be having some influence on policy. But no hint at mechanics yet. From Bloomberg:

President Barack Obama will offer proposals to limit financial institutions’ size and trading activities as a way to reduce risk-taking, an administration official said.

Obama will announce the rules today after meeting with former Federal Reserve Chairman Paul Volcker at the White House. The proposals will be part of an overhaul of regulations and will specifically address firms’ proprietary trading.

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  1. attempter

    I’ll believe this isn’t just grandstanding like the “public option” when it’s actually rigorous in concept, enacted, and rigorously enforced.

    But just reinstating a version of Glass-Steagal’s not sufficient, as Yves said. It won’t be a real step toward taking back the country until all finance casino gambling is simply banned as a legal matter. Bring back the old bucket laws, drive the numbers rackets back to the grimy alleys where they belong.

    As for going overseas with it, there’s no reason to legally recognize those “contracts” either. But if American companies might insist on playing overseas roulette anyway, then that’s the reason we still need hard size caps on these entities, so that none is ever again “systemically significant”.

    Then they can go bankrupt overseas to their hearts’ content.

    But I doubt the global casino would be as virulent as it is without America being the main driver in the first place.

  2. Skippy

    When I see the spittle and foam fly from their lips, arm and fist shake in uncontrolled anger, will I believe a nerve has been hit, a task undertaken, road set upon.

  3. Tim Coldwell

    In early 2008 the City of London claimed it was creating $600bn of derivatives contracts per day.

    A 0.25% tax (stamp duty) giving ~$1.5bn per day to the UK treasury might be an irresistible proposition to any UK Chancellor, let alone politically popular with the majority of voters.

    Does Paul Volcker see this too?

  4. Dan Duncan

    Yves writes:

    “It is not a socially productive activity and has no place in firms enjoying government backstops.”

    Agree with the 2nd half of the sentence. Unfortunately, the 1st half is so ridiculous (and frankly, dangerous) that it completely nullifies what is otherwise a sensible post on proprietary trading.

    Assuming, though, that “social productivity” is factored into the equation on future prohibitions….

    Who should determine what is and what is not socially productive?

    What if an otherwise unproductive activity is taxed? Does it become socially productive, then? How far down this rabbit hole do we go? [Go to a gas station in Nevada get a look at the the 300 lb. 18 year old sitting on a stool, eating beef jerky and slopping up slurpies while engaged in a marathon session of Nickel Slot…the licensing fess paid by the 7-11s to the Nevada Gaming Commission, really add up, so I guess this is “socially productive” to some people.]

    What if we have an activity where some people who engage in it, and do so in a “socially productive” manner—while others do not. Take blogging for example…wouldn’t you argue that some blogs are “socially productive” and others (like those ubiquitous “review” blogs) are not? Do “we” ban those unworthy sites?

    If so, what if a blogger splits up posts b/w “productive” and “unproductive”? Should we then set up a “social productivity test”?

    Do we extend this test to inane Blog Commenters? If so, I better hurry and get this in(!):

    The phrase “socially productive” is used by a self-congratulatory cabal of elitists on the Left in conjunction with the phrase “morally acceptable” by self-righteous religious elitists on the Right…

    …to shove an agenda of shit down the throats of the rest of us: Who just isn’t smart enuff to figure it out on our own.

    1. craazyman

      We can look at the mpirical evidence showing the social consequences of unrestrained prop trading.

      Arid and abstract philosophizing is clever, but if you want to do it really really well then take up mathematics. It’s purer there. And you don’t need to worry about people’s lives being destroyed by ideology.

    2. Kevin de Bruxelles


      It seems to me that in a Republic we elect representatives, whose job is, among other things, to promote “socially productive activities” or “morally acceptable activities” which as you point out are the different names for similar things. So it one of the jobs of a politician to define and make judgements concerning these activities, with as much input as possible from engaged citizens of course as well.

      In addition to promoting the above activities, our elected officials (this is all theory of course!!) also are expected to discourage “socially unproductive activities” or “morally unacceptable activities”. They often do this through laws or by tax policy which, as you point out, often leads to paradoxical results. For example the anti-alcohol taxes in Sweden designed to diminish the consumption of alcohol also end up bringing in huge amounts of tax money into state coffers, which in theory is available to elected officials to further promote socially productive activities.

      As for how deep to delve into and subdivide each activities, these are judgements that should be made by elected officials, and if the public are not happy with the results then, in theory, these officials can be voted out. For example, as you allude to, the internet is generally thought of as a socially productive activity, but if you split in into ever finer slices you will certainly find some that are not so productive. But for a politician there may be bigger fish to fry (for example the growing scourge of gay marriage [sarcasm]) and so they may decide to allocate their limited resources into other activities.

      To not make any decisions concerning “socially productive activities” or “morally acceptable activities” seems to me to be a form of nihilism caused by a paralysing moral relativism. I’m not sure of any society in history that has refused to make these kind of judgements.

      1. DownSouth

        Well I never really know what to think about Dan Duncan. He’s either drunk the Kool Aid and is simply parroting the stuff that comes out of right-wing think tanks, or he’s a brilliant gadfly. Either way, he always makes us question our assumptions.

        As Paul Boghossian wrote in Fear of Knowledge: Against Relativism and Constructivism:

        One source of their (relativism and constructivism) appeal is clear: they are hugely empowering. If we can be said to know up front that any item of knowledge only has that status because it gets a nod from our contingent social values, then any claim to knowledge can be dispatched if we happen not to share the values on which it allegedly depends.

        But that only postpones the real question. Why this fear of knowledge? Whence this felt need to protect against its deliverances?

        In the United States, constructivist views of knowledge are closely linked to such progressive movements as post-colonialism and multiculturalism because they supply the philosophical resources with which to protect oppressed cultures from the charge of holding false or unjustified views.

        Even on purely political grounds, however, it is difficult to understand how this could have come to seem a good application of constructivist thought: for if the powerful can’t criticize the oppressed, because the central epistemological categories are inexorably tied to particular perspectives, it also follows that the oppressed can’t criticize the powerful. The only remedy, so far as I can see, for what threatens to be a strongly conservative upshot, is to accept an overt double standard: allow a questionable idea to be criticized if it is held by those in a position of power—Christian creationism, for example—but not if it is held by those whom the powerful oppress—Zuni creationism, for example.

        The intuitive view is that there is a way things are that is independent of human opinion, and that we are capable of arriving at belief about how things are that is objectively reasonable, binding on anyone capable of appreciating the relevant evidence regardless of their social or cultural perspective. Difficult as these notions may be, it is a mistake to think that recent philosophy has uncovered powerful reasons for rejecting them.

        1. Dave Raithel

          “The intuitive view is that there is a way things are that is independent of human opinion …[and etc.]”

          Sam Harris would agree!!!! Consider his critique of Rorty, e.g., in The End of Faith. (I trust you know my ribbing is good natured …)

          I don’t think the problem is one of “fearing” knowledge so much as it is the failure to be humble about knowledge. That’s the lesson of Socratic aporia, critical philosophy, sociology, and this not really so new fangled stuff called behavioral economics. Ironically, the practical antidote to Mr. Duncan’s “critique” of Yves categories is the pragmatism others above identified: The (more or less) voluntary association of persons in the polity are going to make these distinctions. With experience, we may find them wrongly drawn. But even then, resolution supposes that the parties to the conversation are intending to reach a solution (something about Habermas here, but I’d have to go look it up) and are not being witty and obstreperous for purpose of thwarting any results but their own. As I’ve said before, things would be so much easier for me if everyone just agreed with me, but I have this “social and cultural perspective” requiring me to generalize that as a principle, which of course comes to absurdity.

          The construction of knowledge is never finished, though it may come to a halt once we’re all dead.

          1. DownSouth

            Sam Harris and the other New Atheists always talk a good game—just like Obama. But do they walk the talk?

            Here’s what Jonathan Haidt has to say on the subject:

            I will also take it for granted that religious fundamentalists, and most of those who argue for the existence of God, illustrate the first three principles of moral psychology (intuitive primacy, post-hoc reasoning guided by utility, and a strong sense of belonging to a group bound together by shared moral commitments).

            But because the new atheists talk so much about the virtues of science and our shared commitment to reason and evidence, I think it’s appropriate to hold them to a higher standard than their opponents. Do these new atheist books model the scientific mind at its best? Or do they reveal normal human beings acting on the basis of their normal moral psychology?

            1) Intuitive primacy but not dictatorship. It’s clear that Richard Dawkins (in “The God Delusion”) and Sam Harris (in “Letter To A Christian Nation”) have strong feelings about religion in general and religious fundamentalists in particular. Given the hate mail they receive, I don’t blame them. The passions of Dawkins and Harris don’t mean that they are wrong, or that they can’t be trusted. One can certainly do good scholarship on slavery while hating slavery.

            But the presence of passions should alert us that the authors, being human, are likely to have great difficulty searching for and then fairly evaluating evidence that opposes their intuitive feelings about religion. We can turn to Dawkins and Harris to make the case for the prosecution, which they do brilliantly, but if we readers are to judge religion we will have to find a defense attorney. Or at least we’ll have to let the accused speak.

            2) Moral thinking is for social doing. This is where the scientific mind is supposed to depart from the lay mind. The normal person (once animated by emotion) engages in moral reasoning to find ammunition, not truth; the normal person attacks the motives and character of her opponents when it will be advantageous to do so. The scientist, in contrast, respects empirical evidence as the ultimate authority and avoids ad hominem arguments. The metaphor for science is a voyage of discovery, not a war. Yet when I read the new atheist books, I see few new shores. Instead I see battlefields strewn with the corpses of straw men.

            Haidt goes on to cite specific examples, and I could cite others. But the message we seem to get loud and clear from the New Atheists is: “Do as I say, not as I do.”

          2. chicago mike

            Yves says of prop trading:

            “It is not a socially productive activity and has no place in firms enjoying government backstops.”

            Awwww, it’s a layup to argue that it doesn’t deserve a government backstop.

            But when Yves says that “it is not a socially productive activity” she ought to make that case, especially since she’s opposed by Oliver Wendell Holmes, who once wrote in defense of futures trading:

            “Speculation of this kind by competent men is the self-adjustment of society to the probable.”


            Of course I can’t be sure but two nights ago when I traded $2bb EUR/USD (my biggest volume ever), presumably my activity was “socially productive” to somebody somewhere in Holmes’ sense.

            Or would (to quote Conan’s letter) “the people of Earth” be better served if I were to stop FX prop trading & instead began to propagate the ideas of my hero Richard Rorty?

            What say you good people?

            Here’s a great Rorty essay:

            And this is good too:

          3. Yves Smith Post author

            Chicago Mike,

            I did not say speculation. I said prop trading at major broker dealers. I suggest you not set up straw men.

            They have access to massive, concentrated capital flows, as a result of natural oligopoly tendencies (network effects) plus accommodating regulation. That in turn gives them enormous information advantages. This isn’t speculation as Oliver Wendel Holmes envisaged it. They are not even remotely in the same league.

            And why should the government subsidize speculation, when that it what backstopping it does? We have casinos that show people love to gamble when the expected outcome is to lose money.

            In fact, the backstop means it is no longer speculation. It’s a one-way bet. Head’s I win, tails you lose.

          4. Richard Kline

            So DownSouth, I’m far from sure that your comments are always germane to the post or thread that engenders them, but I always learn sufficient of interest that I don’t care and read on. It has long been my experience that conceptualizing complex wholes involves extending the frame of reference and what is included within it. To me, you do that. Just you be you; I’ll work with that.

          5. DownSouth

            Richard Kline,

            I would argue that these things are germane, because they just keep popping up in discussions about economics.

            In response to one of my almost daily diatribes against the Libertarian-Austrian-Neoliberal axis, broadened a bit to include the entire edifice of classical economics, Edward Harrison responded:

            The people acting as if Libertarianism means ‘no regulation’ have a hidden agenda, in my view. This is ideology pure and simple.

            Likewise, in his lionization of Hayek, Taleb wrote:

            He argued against the use of the tools of hard science in the social ones…


            Hayek attacked socialism and managed economics as a product of what I have called nerd knowledge, or Platonicity—owing to the growth of scientific knowledge, we overestimate our ability to understand the subtle changes that constitute the world, and what weight needs to be imparted to each such change. He aptly called this “scientism.”


            He was right about the social sciences, but what he said about the weaknesses of social knowledge applies to all knowledge. All knowledge.
            —Nassim Nicholas Taleb, The Black Swan

            Now I can accept Harrison’s and Taleb’s and Hayek’s criticism that my beliefs may indeed be “ideology pure and simple,” “Platonicity,” “nerd knowledge” or “scientism,” and especially in the field of economics. Boghossian, after all, makes no claim that the abstract constructions of economics—money and wealth, for instance—are objective. He explicitly asserts the opposite:

            There would, of course, be precious little point in writing a book revealing that facts about money or citizenship are social constructs, for that much is obvious. A social construction claim is interesting only insofar as it purports to expose construction where none had been suspected, where something constitutively social had come to masquerade as natural.

            But Hayek and Taleb and Harrison don’t stop with just telling us the obvious. Instead, Taleb then asserts that what he and Hayek believe in is “bottom-up, open-minded, skeptical, and empirical.” This is of course the same sort of claim that the New Atheists make, that Jonathan Haidt deconstructs so thoroughly.

            I could likewise deconstruct the passage of von Mises that Edward Harrison links to. The Austrian School was and still is composed of ideologues of the worst sort. But they are also hypocrites, just like their New Atheist allies in the fields of psychology and biology. For they invariably claim that their “science” is based in nature and empiricism, which is of course pure hogwash.

          6. DownSouth

            Which of course brings us full circle back to Dan Duncan, whose views Kevin de Bruxelles properly identified as “nihilism.” After all, if everyone is guilty, then no one is guilty. And which, in true libertarian style, leads to the conclusion that no one should be coerced to do anything.

            But it is not so simple as Dan would lead us to believe, for underlying all the abstractions and social constructs of economists are some rather hard realities. The last comment (by Element, which he honestly calls a “polemic”) to Edward Harrison’s post I linked to above, talks about aboriginal societies, and brings us back down to Earth. For underpinning this Tower of Babel the economists have constructed are some pretty basic realities, like eating, mating, affect and insuring the survival of offspring, and the provisioning of these to not just for our own kin.

            I’m currently reading Moral Sentiments and Material Interests by Herbert Gintis et al, and they address some of the same issues Element does. It’s really quite eye opening, and helps show that the entire edifice of classical economics—the “self-interest hypothesis” they call it–is largely mythology.

            But the point is this: If we tear down the temple of orthodox economics, there’s still plenty left upon which to build. We may find that the world is much more complex, and also quite different, from what we thought. But this does not justify the descent into nihilism or, as Boghossian put it, that we make it where the “oppressed can’t criticize the powerful,” as is the wont of Libertarianism.

          7. i on the ball patriot

            I don’t think Dan’s views are nihilistic at all. He struggles for meaning as we all do.

            And your assertion that, “After all, if everyone is guilty, then no one is guilty.”, is simply not true, nor does it lead to the conclusion, “that no one should be coerced to do anything.”

            Everyone is ‘guilty’ of participating in the deceptions required to cannibalize others so as to get needs met and sustain life. Deception is a primary evolutionary force. If you were not deceptive you would be dead.

            Guilty is a word. All words are tools of dominance. And they are all deceptive as they were created and are used by human organisms to get needs met by cannibalizing other organisms.

            Some organisms are more adept than others at using the great array of tools of dominance now available (words and other externalizations of human organisms) and are therefore more responsible than others for greater cannibalization. Scamerica, as a societal organism, excels at creating and deploying deceptive tools of dominance and presently stands as the planet’s head cannibal. All scamericans benefit from this excellence of deception, or at least they have benefited from it in the past. The wealthy ruling elite, who control the deceptive tools of dominance, are now incrementally reducing the crumb share of their middle class cannibals.

            So if you want a more equitable share of the cannibalization then the wealthy ruling elite should be “coerced” to share, and if you want a more harmonious world in total then that concept of sharing and fairness must be extended globally.

            Complexity is a deception that inhibits perception of the far more simple process of deception for dominance.

            Deception is the strongest political force on the planet.

          8. Anonymous Jones

            Having also been recently accused of nihilism on this site, just let me state that while you may take my skepticism (and what appears to be Dan’s skepticism) as a “form of nihilism” (as kevin said above, probably correctly), please understand that nihilism becomes a very subtle and large topic if you are going to start talking about its “forms” and what is close to nihilism.

            I do not think I agree with almost any of the established definitions of nihilism (I don’t understand why you would even entertain the possibility that nothing has meaning), but I do concede that my skepticism can be almost indistinguishable from nihilism in practice.

            Being a skeptic, I could never agree with the extreme forms of nihilism, but as an example of the nihilist-skeptic divide, though I am more properly a moral skeptic and thus could never be a strict moral nihilist (I am agnostic on the issue of universal morality and could never say for sure that it doesn’t exist), if pressed to choose a side, I would have to side with the non-existence of universal morality than the existence of it. So yes, in a sense, it’s a “form of nihilism” and not very distinguishable, at least in the discussion of the existence of morality, but still, it’s not what a lot of people think of when they think of existential nihilism.

            Also, I realize I’m just as guilty as DownSouth in sometimes throwing threads off course (and I also realize I bring far less to the table than he does!), but I still like to contribute what I can.

          9. i on the ball patriot

            “Being a skeptic, I could never agree with the extreme forms of nihilism, but as an example of the nihilist-skeptic divide, though I am more properly a moral skeptic and thus could never be a strict moral nihilist (I am agnostic on the issue of universal morality and could never say for sure that it doesn’t exist), if pressed to choose a side, I would have to side with the non-existence of universal morality than the existence of it.”

            What exists is the struggle within organisms, and groups of organisms, between deception and perception …

            There is a fledgling (on the scale of human existence) ever growing dynamic aggregate earthly (not yet universal) human organism morality that can be found embodied in some of the externalizations of human organisms. Those externalizations — which are all deceptions — would include tribal codes, religious codes (Bible, Koran, etc.), various ‘rules of law’ etc. They regulate the cannibalization process of all organisms within the sphere of influence of the individual code and that are allied with the code. In their essence they profess a somewhat common ‘do unto others’ morality for organisms within the group.

            They also function, because they regulate behavior and viewpoints — and again as a fledgling development — as the dna of the onotron, the future externalized form of the current form of humanity.

            Deception is the strongest political force on the planet.

        2. Anonymous Jones

          As usual, this discussion has gone quickly over my head, but still, here’s my two cents on this quote from Boghossian: “The intuitive view is that there is a way things are that is independent of human opinion, and that we are capable of arriving at belief about how things are that is objectively reasonable, binding on anyone capable of appreciating the relevant evidence regardless of their social or cultural perspective.”

          I agree that is the intuitive view, and while even I think there is a reasonable basis not to reject the first assertion (“that there is a way things are that is independent of human opinion”), I personally find there is overwhelming evidence (from my own opinion and perspective at least) that the second assertion *must* be rejected (“that we are capable of arriving at belief about how things are that is objectively reasonable, binding on anyone capable of appreciating the relevant evidence regardless of their social or cultural perspective”) about anything that is more subtle and less pre-determined than mathematics. We can never rule out that we are the delusional or unreasonable ones (not that I think it productive to live one’s life navel-gazing about epistemological quandaries; I just hate when people tell me to do something because they “know” it’s right).

          And regarding intuition…I think most people start with the intuition that the earth is flat and the sun is small and the sun and moon revolve around the earth. Only one of those four intuitions appears to lead us to a correct conclusion about the “true state of the world.”

          1. TimOfEngland

            Just for a moment I thought “I’m glad it’s not just me that’s in over their head!”

            And then, you made the water deeper.

    3. Siggy

      Lovely rejoinder. If the blog is have impact it needs to rid itself of socially acceptable phrases. One of my peeves (I don’t keep them as pets)is ‘issues’; i.e., we have ‘issues’ with something as opposed to the more direct and confrontational ‘problems’.

      Syntactical parsing aside, its all a lot of blather when the problem before us incompetance and malfeasance. Two hundred years of established contract and bankruptcy law have been thrown out while fraud goes unprosecuted. What the hell is the problem; or, is that an ‘issue’?

    4. LeeAnne

      The photo is crystal clear signaling Volker’s power over the group that has reportedly marginalized him.

      It just could be true that Obama or any politician in representative government is politically constrained to continue entrenched policy until the public coalesces and loudly denounces it. Prior to such clarity who knows what Machiavellian tricks will be performed in the palace.

      Its about time that some of these guys start turning in resignations. Did I see something about Rahm Emanual wanting to run as Mayor of Chicago? OK, so its been denied, but …..

      1. Richard Kline

        So LeeAnne, that photo is a crystal clear illustration of Obama’s need for better visuals; I’m afraid that it’s nothing more than that. Rahm Emanuel is still in power. Tim Geithner is still in power. Larry Summers is still in power. That says all one needs to know about how policy will continue to evolve. Obama opines aloud that he feels that critics ‘just don’t understand’ how much credit Summers and Geithner should be getting for having saved the financial system. _That_ says that their isn’t room in the head of Bo Prez for anything called ‘reality.’ Until there is substantive new policy, active push for it, and results, what we have is a re-jigger of rhetoric and illusion. In fact, that photo makes me trust Obama and the potential for change even LESS than before, exactly because it confirms his instinct for media calculation over substantive action.

    5. LeeAnne

      Being socially productive matters when you’re licensed to serve the economy’s need for institutions that distribute the people’s capital for financing, nurturing and judging businesses people need for their goods, services and employment.

      The nation depends on the integrity of its institutions; banking is one of them. Would you personally trust your savings to the guy who runs the numbers’ racket in your neighborhood just because he handles money and excels at a game whose arcane details you’re not thoroughly familiar with?

      These are pretty simple concepts. It has been the practice in recent decades for the powers that be to confuse the public with complexity. Without powerful laws, regulations and oversight to keep the bankers from dipping into the vast amounts of money and power they are meant to nurture and protect, there will be no trust in American banking, and worse, in the value of the country’s currency. You will be experiencing the results of the corruption in these institutions that have failed us utterly very soon if you haven’t already.

    6. i on the ball patriot

      Dan Duncan says — “Who should determine what is and what is not socially productive?”

      The members of the society Dan.

      A society is an alliance of individuals formed to get needs met. When some members take more than a fair share — whether they be prop traders, fat food pushers, the Nickel Slot cartel, etc. — at the expense of other members, then all members of the society have a stake in remedial action.

      That remedial action would include pointing out that those who engage in the grosser cannibalization of members within the group are engaged in activities that could be characterized as, “not a socially productive activity”.

      The question then is to determine which activities are more, or less, productive (beneficial) to the society — to prioritize which are the most harmful to the society at large.

      I would say that the rigged electoral process, that prevents expression of the will of the people, is the most harmful, as it disallows any suggested remedial action (that might reduce or eliminate the most gross societal cannibalization) from ever being implemented. In fact, and worse, that rigged electoral process facilitates that gross societal cannibalization.

      Further; after a while you have to begin to wonder if those people who constantly suggest these remedial plans for deaf eared uncaring politicians, that could really give a shit less, are really very astute after all. Especially when they continually implore you to write to those ‘elected’ scum bags and vote. It is those losers who vote that are the problem. They only serve to validate and legitimize the system that enslaves them. They meekly give up their power.

      Deception is the strongest political force on the planet.

    7. kharris

      Um, you need to take a breath with this “socially productive” response. Nobody ever said that taxing a socially unproductive activity, an activity with negative externalities, er whatever, makes it productive, cures the externality of makes it less whatever. This is all Pigou – you can tolerate, prohibit or tax. Tolerating the bad is bad. Prohibiting the bad often doesn’t work, and some things are only bad if there is too much – calories and booze, for instance. Taxing doesn’t make the activity socially useful, but does produce revenue that can be put to socially useful use.

    8. Yves Smith Post author


      Did you bother reading the post? I very clearly said prop trading does not belong in a backstopped firm and I would have it banned. The leaks thus far also talk about size and complexity limits, not taxes.

      1. Dan Duncan

        Yves, yes I read your post. I said it was a sensible post, but for the assertion about “socially productive”.

        Then, of course, I rambled on and on and on (and on!) about how silly that phrase is.

        I agree there should be limits on proprietary trading. But “social productivity” has nothing to do with it.

        1. i on the ball patriot

          “I agree there should be limits on proprietary trading. But “social productivity” has nothing to do with it.”

          Why then would you impose limits?

          Deception is the strongest political force on the planet?

        2. marc fleury

          You can argue all you want about social value but it doesn’t take a genius to see that finance enabled the mother of all liquidity implosions that sent the real economy in a tail spin. I think Main Street sees that all too clearly, hence the populist overtones of Obama.

          I hold that prop trading in the form of naked CDS, synthetic CDOs etc created the mother of all liquidity drains and precipitated the crisis.

          On a separate note, yes it is good to see Volcker back in the driving seat. If he doesn’t keel over and die (the man is 83!) in the coming days, we may finally see some progress on reform.

  5. fajensen

    And you have the AIG and LTCM precedents …. that entities largely exempt from regulation put the entire financial system at risk.

    Maybe, just maybe, we should actually run the experiment to see whether the “entire financial system” is REALLY “at risk” or it is just self-serving propaganda from the people who are accustomed to being bailed out again and again!

    Bailing LTCM was a *huge* mistake IMO, it left the idiots monied so they could continue to make stupid bets and set the precedence for AIG.

    Its like lending support to ones psychopath cousin, he will not change, he will just increase the scale of his scamming because he now has more resources available, thanks to your help!

  6. darkmatter

    at this point i doubt most would even be satisfied to eat just one serving of roast leg of lloyd.

    the simple fact is that when we find the exact regulatory structure and laws that ensure goldman will be reduced to rubble, well that’s when we have found what needs to be done.

  7. Edward Lowe

    Obama is just doing more rhetorical policy wish making to placate people like Yves. This is a tactic to get you to write nicer things about him. If Obama really was getting religion he would be announcing today that he has accepted the resignations of Larry Summers, Tim Geithner, and will be replacing Romer with Volker. Until he relaizes that his advisors are wrong about most that they are telling him, he remains adrift with that albatross about his neck.

    1. LeeAnne

      The photo is crystal clear signaling Volker’s power over the group that has reportedly marginalized him.

      It just could be true that Obama or any politician in representative government is politically constrained to continue entrenched policy until the public coalesces and loudly denounces it. Prior to such clarity who knows what Machiavellian tricks will be performed in the palace.

      Its about time that some of these guys start turning in resignations. Did I see something about Rahm Emanual wanting to run as Mayor of Chicago? OK, so its been denied, but …..

    2. kharris

      Cabinet level departures take place during Washington’s Christmas break. If firing Geithner is your metric, you need to sit tight for another 10 or 11 months. Since there will will be a whole lot of other stuff on which to judge Obama’s peromrance between now and Santa’s arrival, I don’t think Geithner’s employment status is your best evaluative tool.

  8. Francois T

    “Obama will announce the rules today after meeting with former Federal Reserve Chairman Paul Volcker at the White House.”

    Well, well well! Obama remembered Paul Volcker’s existence.
    Ain’t that sumthin’?

    How long before Timmy Boy and Slick Larry leave? Can’t wait for that to happen.

  9. MichaelC

    I noted that O voiced his outrage at banks betting against their customers. That was good to hear and a pretty good signal that the politicians are going to run with this.

  10. j d ess

    Nicely timed. Good set up into November.

    I’m sure this was all part of the plan — “Have at it this year, boys, because in 2010 we’re going have to placate the masses. After the election, we’ll talk again. Don’t worry about it.”

    And good to see Volcker at the President’s side.

  11. Paul Tioxon

    The politicians are the specialists, who we elect to carry on the common business of the public. The invention of the US republic, as opposed to a kingdom, is not a form of private property but the political entity from which private property arises. The capture and control of this political process, and the systematic diversion of all the rightful benefits to society at large, and all us as individuals, is the concentration of wealth, power and money into the hands of a small percentage of the population. While Sen Brown signals something, it is good that politicians are mindful of the pulse of the public. It is not good that necessary health care reform is wiped out because of one man’s election. If DC cannot look out for the good of the whole, even at the cost of their political career, or the wrath of the minority who lost the 2008 November general elections, what is the point of working for a winning candidate and the party that gains power, what is the point of the 67 million that voted him in, and delivered an overwhelming Senate majority and Congressional strangle hold? If George Bush could lead us to war, whether it was needed or not, a far greater expense in taxes and borrowing, lives lost, lives wounded, and ruining our standing in the world community, how is that a needed domestic reform could cause such trepidation, back pedaling, uncertainty, rage and revolt among the same politicians, many who voted to go to war, but cannot find the motivation to act as leaders, duly elected, to take care of society as whole, even at the expense of some subset of their constituency. I do not, even now, see the Republicans humbled, witness the mouthing off of Dick Chaney. With all of the resistance and protesting against their failed policies and incompetence, I do not remember any let’s slow down and do this in a gentleman like manner. How long did it take for Al Franken to be seated in the Senate? It is clear what the difference is, while the Democrats are not unanimous or homogeneous in ideology, they are constituted by a cadre that believes in using government to provide for goods and services for individuals and society as a whole. The Republicans are almost uniformly protecting the power and privilege of various wealthy individuals, the industrial, agricultural, and financial sectors of the economy. They vehemently vote against social and political programs that favor labor over capital and do not want the government to deliver any service other than defense, including local policing. They have even fought to rid the US Postal service from its traditional government status, despite being the original intention of the founding fathers, Ben Franklin being the first Post Master General, a cabinet level position. A global integration of nation state economies will see a leveling of the playing field, and a need to restructure to compete, to grow and progress. The inability of the reactionary elements of our society to accept the restructuring will cripple us slowly, as other rapidly developing societies embrace our technologies and move ahead us, as we fight over dinosaur exhibits and evolution, gay marriage and abortion and the willingness to export our hard currency for crude oil, when we could have been into a 3rd decade of a transition into solar power.

  12. scharfy

    You gotta love the insanity of Washington,DC.

    Spent the back half of 2008 and early 2009 combining commercial banks and investment houses, – to protect us from the sky falling.

    Now their gonna break ’em up? funny.

    Anyway citi and others lost money the old old fashioned way – BAD LOANS AND LAX LENDING!!!!!!!!!!!!!!

    They are punch drunk from the MASS senate defeat and are trying to stir populist rage. It seems so faux, the timing and all. I can almost hear Rahm devising his evil plan, saying we gotta give em waht they want. BANKERS!!! However after a year the people can see the truth clearly.

    They are cozily in bed with big finance. All of them.
    THE END.

  13. tpn

    The Obama people might not have anything to lose at this point. Since his politics are what seem to be driving his policy, and his popular base feels burned (voters, not contributors), it doesn’t matter at this point how many people have to take a haircut if he takes a sudden hard line reform route. He may go down as being the “worst president”, but if he ends up taking a sacifice, in 20 years he may garner the respect that Carter does now (as a humanitarian, not as an ex-President). Either that, I’m giving him too much credit, and this is merely a Hail Mary pass, to little and too late.

  14. MichaelC

    I see this as the opening salvo in the battle to dismantle the universal banking model.

    These 2 moves follow Volcker’s G30 work, so the model will be under coordinated US/Eur attack. Rolling back Glass Steagel repeal in the US was always a non-starter if the US did it unilaterally.

    Obama may have signed on for political expedience, but Volcker has his eye on big banks, not only big US banks. And he has the gravitas to head a global reorganization.

    As an aside, there was an interesting note yesterday about JPMs bid to buy RBS commodity arm. It struck me as odd JPM was poised to become even more TBTF, given CITIs recent Phibro spin off. Volcker was a factor in forcing CITI to dump it, so I was impressed at JPMs ballsy move to buy the RBS unit. I think that deal is dead after today.

    1. Robin

      I very much hope you are correct. To me, I see this as more lip service, in response to tanking poll numbers. So I hope I am completely and totally wrong, and that you are right, and I have to man up and say I was wrong. It would make me most happy to do so.

      Still, I fear that Obama missed the Opportunity, and it is just too late.

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