Volcker Rule Now A Reality
U.S. financial regulators have now approved the Volcker Rule, despite intense sustained opposition from powerful banking industry lobbyists. This confirmation reflects the profound sustained efforts of Paul Volcker, who served as Chairman of the Economic Recovery Advisory Board during President Obama’s first term.
The reform returns the United States to separation between commercial banking and the risky activities involving trade in complex financial derivatives. Some exceptions are granted, including limited direct investments for clients and in defined forms of hedging. The devilish nature of the details involved, along with the legions of bank lobbyists mobilized in opposition, resulted in the exceptionally long review process.
Initially the reform was to be inserted into comprehensive consumer protection and financial reform legislation. The distinctiveness of the reform, however, soon led to the matter being considered separately.
Initial reception was lukewarm. Senate Banking Committee Chairman Christopher Dodd opposed immediate full implementation, but editorial commentary that the measure was dead on arrival proved premature. Related predictions that regulatory consideration would be dragged out indefinitely have now – finally - been proven wrong.
During the Great Depression, the path-breaking Glass-Steagall laws accomplished what Volcker proposed. The New Deal reforms also secured individual savers by establishing the Federal Deposit Insurance Corporation (FDIC). A strong regulatory hand was extremely popular in that desperate time.
In 1999, Pres. Bill Clinton and Federal Reserve Board Chairman Alan Greenspan presided over Congressional repeal of Glass-Steagall, setting the stage for the devastating excesses which sparked the severe recession.
Observes of Volcker’s initiative initially were pessimistic about success. The extremely long road to passage and implementation does validate that concern. Now critics complain the regulations are not strong enough. However, during the first week alone many banks have scrambled to divest collateralized debt obligations and other risky forms of casino banking.
Continuing the gambling analogy, Volcker held strong cards from the start, including strong public and professionals’ support for re-regulation. Polling members of the Chartered Financial Analysts Institute showed 68 percent supported reform.
Underestimating durable Paul Volcker remains unwise, a point underscored by his now very lengthy career. He served in senior Treasury Department posts in both the Kennedy and Nixon administrations.
President Jimmy Carter picked him to lead the Federal Reserve at a time of exceptionally high inflation and unemployment. Chairman Volcker broke the back of that great inflationary threat through tough disciplined policies of high interest rates and tight money. He killed a spiral which left unchecked would have killed our economy. Price stability in turn encouraged new job-creating investment.
His more recent posts have included chairing the International Accounting Standards Board and investigating scandals associated with the United Nations Oil-for-Food program in Iraq. The former role involved altering entrenched attitudes and bureaucracies on a global scale, while the latter was a political minefield, with dedicated opponents on the political left and right.
Volcker persevered. There was reconciliation of differing national accounting practices. The final Oil-for-Food reports absolved UN Secretary-General Kofi Annan of personal corruption, while targeting problems in the system and suggesting practical reforms. Volcker received high marks for his performance on both fronts.
Devilish details did not prevent effective financial reform. Volcker is a master of detail, and also of backstage maneuvers.
Paul Volcker deserves public recognition as well as respect for his latest service to the nation.