Whither Volcker Rule and Other Options for Reining in Big Bad Banks

Gerry Epstein of PERI speaks to the Real News Network about the out of the headlines negotiations on Volcker rule implementation as well as other ideas for bringing major banks to heel.


More at The Real News

It’s worth noting that Epstein is not aware of the fact that Occupy Wall Street’s Occupy the SEC group has a subgroup that is providing extensive comments on the Volcker (their first set was on the proposed repo exclusion).

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29 comments

  1. Ralph Musgrave

    Epstein proposes detailed scrutiny of banks. That’s a bureaucratic nightmare. The regulators couldn’t even figure out that Bernie Madoff was a fraudster despite being told loud and clear ten years ago that he was up to no good.

    The solution (in addition to breaking up big banks) is to draw a sharp line between money which depositors want to be 100% safe, and money they want their bank to invest. The former should NOT be invested by a commercial bank: it should for example be deposited at the central bank where it will earn little interest. But depositors would get a government guarantee.

    Or as Mervyn King, governor of the Bank of England put it, “If there is a need for genuinely safe deposits the only way they can be provided, while ensuring costs and benefits are fully aligned, is to insist such deposits do not coexist with risky assets.”

    As to money which depositors want their bank to put into commerce, mortgages etc, that’s business. There is no reason a government guarantee this. And there is no reason for detailed government scrutiny. If a bank wants to do ultra risky proprietary stuff, let it. And if it all goes belly up, it’s not the job of taxpayers to come to the rescue, any more than its taxpayer’s job to rescue those who put money into South American gold mines or Bernie Madoff’s Ponzi scheme.

    1. RepubAnon

      Adequate funding of the regulatory agency via an earmarked transaction tax would have helped stop the Bernie Madoff situation.

    2. LeonovaBalletRusse

      Actually, the “hook” for getting banking customers to accept risky business by bankers was the “interest bearing checking account.”

      Before that, demand deposits of customers were safe and insured, but there was no interest paid on checking accounts. We should return to Glass-Steagall, local commercial banks who lend to their customers, and gain new checking account customers via making good loans. The duty to “know your customer” must be serious. There must be no commingling of a client’s money with the banks. In return, serious customers will establish loyal relationships with their bankers, to put trust back into banking.

      Banks also used to provide car loans to their customers, until people were seduced by the “dumping of credit” by GMAC and other car dealers, working corruptly in competition with banks. “Community” must have meaning again.

      Unfortunately, Americans just can’t believe that “there is no free lunch.”

      It’s going to take discipline and mature cooperation, also from consumers, for local banks to want to court their community instead of the Big Whores.

    3. Ashwin

      I fully support Ralph’s ideas. Think of this idea as a “public option” for deposit and transactions banking. We don’t restrict what the banks do in their current lines of business but we introduce a safe vanilla deposit+transactions medium option.

      In a world where the state already issues a significant stock of short-tenor public debt, this is just a way to allow more free access to this stock to the masses and converting this stock into a transactions medium tied in to the existing payments network etc. http://www.macroresilience.com/2012/01/05/the-public-deposit-option-an-alternative-to-regulate-and-insure-banking/

  2. jake chase

    All this agonizing over bank regulation ignores history, which, of course, repeats itself, the first time as tragedy, the second as farce. Marx told us a great deal, but this is the one thing he said with which nobody can argue. As recently as the 1960s, banks were safely boring, limited geographically, reasonably sized, reined in by Glass Steagall. The worst thing they did was lend imprudently to relatives, and when they blew up the regulators could resolve them so quietly that nobody noticed. Walter Wriston and David Rockefeller changed all this with idiotic (insane?) “growth” strategies: recycling deposits which had been extorted by oil sheiks in loans to dysfunctional “developing” country kleptocracies, as the first stage of the neoconservative asset grab which was big capital’s pushback against third world development economics. You had a crisis (and a bailout) in 1980, and instead of learning anything Congress turned cartwheels to deregulate banking and enable looting of savings and loans, which gave us another crisis by 1990, after which big capital turned its attention to looting the middle class, first through a stock bubble (and crash), and then through a mortgage bubble (and crash), meanwhile erecting a house of cards in credit default swaps which still leaves us only an eyeblink or so from finanancial tsunami, despite ($15?, $20?) trillions in Fed giveaways to the megabanks which are simply engines of looting. All of this was predictable to anybody with his eyes open, but nobody was looking because they were too busy stealing and toadying and making up fantasies of “growth” stories, which would enable all those with nothing to look forward to having “more” in perpetuity, while those owning substantially everything would never have to shake loose from any of it, and indeed could keep grabbing more and more and more and more.

    America can solve much of the problem with a universal bailout and a return to strictly limited commercial banking: small banks restricted to boring banking functions and backstopped by the Fed. Investment banks allowed to blow themselves up. Shadow banks eliminated by a return to sensible interest rate regulation. This would still leave the problem of industrial and commercial monopoly, but a steeply progressive tax on corporate capitalization would help to minimize its predation. I don’t expect any of this to happen in my lifetime, and unless it does happen the machine will simply grind along destroying those on the bottom, unless it blows up and destroys everyone.

    1. Paul Tioxon

      It’s funny you should mention Marx. His concept of fictitious capital, money made from money, not from industrial production and its profits, is now what we all call the financialization of the economy. He saw it in his observations of the British Empire and its global colonial trading and banking system. Today, we have an even more powerful global capital flow and the US Dollar itself is even more so an instrument of profits, more than the de-industrialized, once upon a time manufacturing titan that is the current USA.

      AT NC, we observe an alternative academic school of thought in Economics emerging with force as the MMT school. Through out the world, simple lessons of scientific knowledge built up one piece at time deliver valid propositions, in this case about how economies do and do not work. The state owned public banks are instruments to place capital in the service of rational goals for the prosperity of The Great Community. They can grow next to the existing system of too big to fail banks. With more mutual corporate entities such as these, there will be some economic institutions functioning to help operate the business needs of an economy that we have on a scale for over 310 million people in America.

      Capitalism did not appear fully formed all at once in the global system that we now see. It came into being alongside a dominant political system of kings and armies and over time grew to be an equal. Similarly, public banking and the attendant cultural and political changes necessary to see it expand and grow in power will not come with the stroke of pen placing public needs first and privileged class profits an after thought. I would like to continue to eat through out the year and not freeze to death in the winter. A new economic order will not appear fully formed any more so than capitalism did. It will have to prove itself to people in the real world as capable of taking care of the business of fulfilling the everyday needs as well as long term needs, long term in their individual lifetime such as retirement. We will have to build it in the here and now real world and run it on a smaller scale until the day comes when it will be needed to pick up the pieces of the next great financial calamity.

      There is an up coming conference about Public Banking that you can view at this link.

      http://publicbankinginstitute.org/events.htm

      Here is a paper discussing the role of fictitious capital and the role it played in the financial disaster and shows why the Volcker rule is important to control prop trading and other risky money making money schemes.

      http://vsites.unb.br/face/eco/textos/didaticos/WP%20335.pdf

      1. jake chase

        State owned public banks? Just imagine the Phil Gramm Bank, the Barney Frank Bank, the Nancy Preposterous Bank, the (Small) Change Obama Bank, all with unlimited checkbooks. No thanks. I think we stand a better chance with 10,000 privately owned banks restricted functionally and geographically, circa 1960.

        1. Paul Tioxon

          No, I can’t imagine. Imagine this, 25,000 state licensed banks, all gone except for maybe 6000 or so left. Your “Leave It To Beaver” world is gone with the wind. Credit unions are growing, but I have seen one of them hijacked as well. Public banks don’t need to be imagined by your negative cynical comments. Imagine, taking the time to go the links and read them, the way I take the time to read what you have to say. Imagine, coming up with solutions and struggling to husband them to maturity.

          1. jake chase

            Negative, cynical? Did I make up Phil and Barney and Nancy and BHO? Leave it to Beaver? I prefer to leave it to beavers, lots of them. I failed to mention the Lenin Bank or the Castro Bank. Now, that would have been cynical. Look, we agree the system has to change. But every experiment in concentrating power for more than one hundred years has backfired. That is one thing Hayek’s Road to Serfdom is spot on about. Forget about what you think about him. Every powergrabbing bullshit artist can talk persuasively about the “public interest” and what he will do to improve the “general welfare”. In practice, they act principally in their own interest and the interests of powerful cronies. And the more political power you give them, the worse the people are who come up to grab it.

          2. EH

            Credit unions are growing, but I have seen one of them hijacked as well.

            Don’t be cagey, cough it up.

          3. LeonovaBalletRusse

            jake and Paul, don’t you think what we need is a whole nother way of getting real money into the hands of real people who can and will build the Real Economy together. You both have deep memories, which serves us at NC well, but we must find an alternative to dealing with the same old, same old bankers and their recruits out the Ivy League gravy-trainers feeding the same old machine.

        2. Lyle

          Of course one state has such a bank, North Dakota The Bank of North Dakota state owned and run. It should be noted that it does not have FDIC insurance but rather is insured by the full faith and credit of North Dakota (which is getting better with the Bakken Oil). It was founded in 1919.

      2. citizendave

        Here is the welcome message from The Bank of North Dakota’s web site: “…As the only state-owned bank in the nation we act as a funding resource in partnership with other financial institutions, economic development groups and guaranty agencies. We have four established business areas: Student Loans, Lending Services, Treasury Services and Banking Services. BND’s support services and dedicated employees provide you with the best customer service…”

        http://banknd.nd.gov/

        My inexpert sense of BND is that it approaches the idea of utility banking. They are conservative — in the good sense of the term, meaning they don’t take unnecessary risks with other people’s money. I believe the Republicans tend not to like the idea of a state bank because it would tend to diminish opportunities for their banker cronies to extract funds from the rubes.

        I view public banking as apolitical, similar to the way the electric company should be apolitical.

        BND came through the Great Recession unscathed, evidently because they operate on sound principles. What’s not to like?

        1. LeonovaBalletRusse

          citizendave – “apolitical” electric company? Did they bury Tesla for our benefit?

    2. jsmith

      “This would still leave the problem of industrial and commercial monopoly, but a steeply progressive tax on corporate capitalization would help to minimize its predation.”

      My question is, why stop your following idea with just the banks?

      “I think we stand a better chance with 10,000 privately owned banks restricted functionally and geographically, circa 1960.”

      Why not place limits of functionality and geography on ALL industries?

      No more WalMartizations of local communities, no more parent companies screwing over the local labor forces by outsourcing or by playing interstate labor arbitrage pitting one state’s workers against anothers.

      Corporations would lose the largesse/immunity they enjoy from abuse of the interstate commerce clause.

      Corporation wouldn’t be able to shop around for the state with the most lax tax codes or labor laws for them to do business in.

      Revive the power of corporate charters at the state and municipal levels so that states/cities have the ability to decide who gets to do business within their geographic limits.

      I agree with what you’re saying but what’s good for the banks would be good for ALL corporations – “global competitiveness”, “efficiency” and all other neoliberal catchphrases be damned.

      This whole propagandistic meme that “regulation is killing business” needs to die a quick death and the first step towards that is for the neoliberally brainwashed to finally understand that large corporations are NEVER to the benefit of the common person – never.

      1. jake chase

        I agree that smaller is better when it comes to corporations. There are no industrial advantages to giant corporations. Historically, corporate charters were once strictly limited.

      2. LeonovaBalletRusse

        jsmith, and no more Koch Brothers fixing the vote in every state? Your ideas are excellent for out times. They fit in with the vision of an orderly transition to the Real Economy of We the People, which includes de-leveraging by elimination of the old monopolies of the Old Regime.

        Regime change now! But peacably. Brains are much better than brawn at this game. Let’s call the shots ourselves.

  3. Woodrow Wilson

    “They still depend on the political and financial support of big banks” –

    Well, they gave you the middle finger the first time, and “Plan B” isn’t going to work either. The banks will be protected by this CONgress, and probably any Administration subsequent to Obama.

    It’s pretty clear TBTF’s run the show, both politically and financially. All the harsh language in the world is not going to change the way they do business. When/if they crash again, The Citizenry will be robbed again and say “thank you, may I have another”.

    It’s going to take a completely different way of thinking and/or action to get things changed in this completely corrupt Plutocracy.

    1. LeonovaBalletRusse

      WW, exactly. It takes the kind of “work it out” discussion we see day after day in the NC Senate. We are going to get to some solutions ourselves, as we share these discussions with whoever tunes in. Those of us with deep memory of “the way it was” before the Southern Strategy ruled the world are helping the youth on their feet at OWS rallies to expand their knowledge efficaciously.

  4. Richard

    Good luck with the response to the SEC. My experience shows that regulators, including the SEC, ignore the extensive comments submitted by well-informed third parties who are not from the sell-side (the banks, their lobbyists or the trade groups controlled by the banks).

  5. 1 of the Occupy the SEC

    Woodrow and Richard,

    ‘It’s going to take a completely different way of thinking and/or action to get things changed in this completely corrupt Plutocracy’. and
    ‘Good luck with the response to the SEC’.

    Perhaps you (Woodrow) haven’t noticed that there IS a completely different way that is scaring shit our of the plutocracy. The scare is that Occupy won’t cohere enough to make themselves vulnerable to a conventional anti-Tea Party dismissal. And they should be scared.

    Small groups of people who just don’t give a shit about conventional political strategy are finding each other via the diasporic Occupy ethos. Those connections are non-violently disquieting the plutocracy. Zuccotti wasn’t shut down because there were too many unruly people there. They were shut down because there were too many unruly ideas being heard. I don’t think Occupy wants to rule. They want the elected to change so they can get on with their lives unmolested by the few.

    What’s not to love about that. And who cares if Occupy doesn’t evolve into a mass movement if a few Occupiers are successful in using populist leverage to counter TBTF leverage used against the rest of us.

    Perhaps the efforts of a few fed up folks with industry knowledge to draw attention to flaws in the regulation by making substantive rebuttals that will become part of the public record will be dismissed. Perhaps it won’t.

    I’m comfortable erring on the side that it may make a difference. Bitching in the public record sounds like a better use of your time than despairing in blog comments.

    Start here:
    http://occupythesec.nycga.net/faq/#whycomment

    1. LeonovaBalletRusse

      1 of the Occupy, you are so right. They just kaint git a grip on it, and they are dead afraid of what they cannot control. We’ll keep them off their game, stewing in their own foul juices, or “twisting in the wind”–take your pick.

      Thanks for Occupying the SEC–a really shrewd move.

    2. Woodrow Wilson

      “Perhaps you (Woodrow) haven’t noticed that there IS a completely different way that is scaring shit our of the plutocracy. The scare is that Occupy won’t cohere enough to make themselves vulnerable to a conventional anti-Tea Party dismissal. And they should be scared.” –

      Scared? Are you shitting me? OWS got their asses kicked across the country. My city, Boston, was the last city, only because Mayor Menino played like he was some pauper. In the need, OWS lost.

      OWS, and the idiots using the “Anarchist Cookbook” will continue to get their asses kicked. OWS is outgunned, outsmarted, and outnumbered, mostly because a large proportion of them have idiots that don’t work in finance or law, or have any sound tactical knowledge outside some stupid retard book. Some, which sadly always get played in MSM, is part of “The Free Shit Army” (h/t KD).

      Let me know when OWS and the like finally understand that the people your protesting (unless is CONgress it’s a waste), don’t give a fuck. When you’re prepared to put your money where your mouth is, and know how to do it, and have the people with the expertise how to do it, let us know.

      1. Carla

        Really, Woodrow?

        So were the rabble who fought the American Revolution putting their money where their mouths were? Or their lives on the line?

        It’s true, it’s tough for peaceful un-armed citizens to face a militarized police response dictated by the “Homeland Security Dept” of the most powerful war-mongering nation on the planet. And Occupiers did it in every major city in the country. And they will do it again. For you, Woodrow. Even if it drives you nuts. They’ll do it for you. And for me. For US.

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