The Volcker Diversion

Today’s WSJ editorial: Amen.

No banking rule can protect against a credit mania fueled by bad policy.

Could even Paul Volcker draft a Volcker Rule? Team Obama and Democrats in Congress couldn’t figure out how to turn his sensible idea—prohibiting banks from gambling with taxpayer money—into law. Now Mr. Volcker seems to be acknowledging that federal regulators can’t draft a Volcker Rule either, at least not without help from the same bankers who will be subject to it.

As the public comment period ended this week on the draft federal rule to prevent commercial banks from trading for their own account, Mr. Volcker submitted his own public letter to the bureaucrats. According to the former Federal Reserve Chairman, “simplicity and clarity are challenging objectives, which for full success, require constructive participation by the banking industry. As I have suggested elsewhere, there should be a common interest in an approach that, to the extent feasible, is consistent with the banks’ broader internal controls and reporting systems.”

For those hoping that Washington would draw bright lines inconsistent with the desires of too-big-to-fail banks, this isn’t exactly an inspiring message. Mr. Volcker’s basic idea—to place Wall Street trading outside the taxpayer safety net—remains as sound as ever. But as we noted last fall, the draft rule with its hundreds of questions and thousands of ambiguities demonstrates that regulators are not capable of executing a full Volcker.

They’re not the first to fail at this task. Two years ago, Senator Chris Dodd and Representative Barney Frank tried to draft a Volcker Rule as part of their 2,300-page overhaul of financial regulations. So-called proprietary trading was to be banned from commercial banks.

But one man’s proprietary trade is another man’s customer service, and still another man’s hedge against credit risk. Lawmakers didn’t have confidence in their ability to sort out the differences, so after carving out a few explicit loopholes, Messrs. Dodd and Frank asked the bureaucrats to fill in the rest of the blanks.

Now even Mr. Volcker seems to be conceding that this sausage can only be made if more bankers are invited to join the federal cooks in the kitchen. Expect complexity, disparate treatment, regulatory arbitrage, higher costs and—perhaps the most dangerous Washington creation of all—the illusion of safety that only regulation can provide.

And while Dodd-Frank exempted debt from issuers like the U.S. Treasury, Fannie Mae and Freddie Mac from the Volcker Rule—allowing banks to continue heavy trading in these markets—the law didn’t exempt the sovereign debt of other nations. Finance ministers around the world have been calling Washington with alarm about the potential impact on liquidity.

We hold no brief for spendthrift governments seeking a broader market for their bonds. But if Messrs. Dodd and Frank were confident they weren’t disrupting the legitimate functioning of debt markets, why did they exempt Fan, Fred and Uncle Sam?


The larger problem with the Volcker Rule to-and-fro is that it furthers the great deception of the financial crisis—that it was all caused by a lack of such rules, and so can be fixed by still more rules.

Mr. Volcker himself understands this isn’t true and has acknowledged that his rule, even if someone could figure out how to draft it, would specifically not have prevented the 2008 disasters at AIG and Lehman Brothers. But most of the political and regulatory class still promotes the fiction that the only sinners were greedy bankers who simply need more political supervision.

The truth is that the financial crisis resulted from a policy-driven credit mania that would make the Volcker Rule look like a New Orleans levee during Katrina. The main causes were loose monetary policy, federal incentives to invest in housing turbocharged by Freddie and Fannie, government-approved credit ratings, and the standard greed that is present at all times and in all human endeavors. All of Washington, Wall Street, the housing lobby and much of America enjoyed the mania when prices were going up—which is why Alan Greenspan and Ben Bernanke failed to see the trouble coming and even now refuse to admit any culpability.

However it is written, the Volcker Rule is at bottom a diversion from the real solutions that would protect taxpayers from a repeat. These include more careful monetary policy, which we are still not getting; less politically directed credit creation, which is still not occurring; and a Congressional plan either for allowing large banks to fail or for breaking them up, which we still don’t have.

Allowing regulators and bank lobbyists to negotiate for years in the gray areas will not protect either taxpayers or an economy that needs a vibrant banking system.


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