Volcker Rules

No issue is more critical to ensuring our nation’s long-term economic health than addressing America’s dysfunctional financial regulatory system. Unfortunately, like so much legislation lately, the Obama administration’s economic reform agenda has fallen victim to prolonged partisan gridlock in the Senate.

However, it looks like bank reform has finally found its champion: Former Federal Reserve chairman and current chief of the President’s Economic Recovery Advisory Board, Paul A. Volker.

Volcker deserves to be commended for his role in shaping legislation that, according to The New York Times, “Would ban banks that take federally insured deposits from investing in hedge funds or private equity funds and from making trades that are for the benefit of the banks, not their customers, a practice known as proprietary trading.”

As stated in the U.K.’s Telegraph, the act will also, “block banks from takeovers that would give them in excess of 10% market share.”

Modeled on the Depression era Glass-Steagall Act, the so-called Volcker Rule would play an essential part in preventing financial institutions from becoming “too big to fail” and prohibit them from engaging in the sort of risky trading practices that brought about the financial crisis in the first place.

President Obama voiced his approval for the measure in January and, as The Times reported, its supporters include, “five former Treasury secretaries, elder statesmen like William H. Donaldson and John S. Reed and prominent investors like George Soros.”

Testifying before the Congressional Oversight Panel on Thursday, Citigroup CEO Vikram Pandit also endorsed the rule, “Banks should operate as banks, focused completely on serving their clients.” Pandit also spoke up in favor of, “regulations that promote transparency, particularly in the derivatives markets.”

“We are selling 40 percent of the company…We are breaking it up…This is a different company,” Pandit continued. After offering this rare mea culpa, he also acknowledged that “Citi owes a large debt of gratitude to American taxpayers.”

Not only is this Wall Street CEO’s honesty refreshing, but his observations also demonstrate how vital the Volcker Rule is to ensuring that financial institutions don’t repeat the mistakes of the past.

Pandit concluded his testimony by backing improved safeguards for consumers of financial products, “Recent experience reinforces the truism that what is best for consumers is also best for the financial system and the economy. I strongly believe that consumer protection can and should be strengthened at the federal regulatory level.”

Unfortunately, Congressional Republicans don’t share Pandit’s view and they’re fighting the creation of an independent Consumer Financial Protection Agency with all their might.

As The New York Times observed, “Most Republicans object to a new freestanding regulator with broad authority, while most Democrats back proposals to create a regulator that can operate with substantial independence.”

As a compromise, Senate Banking Committee chairman Chris Dodd (D-CT) suggested burying the agency within the existing framework of the Federal Reserve.

However, even this major concession isn’t enough to satisfy Senator Richard Shelby (R-AL), the Banking Committee’s ranking Republican. “It doesn’t matter that much whether it’s housed in the F.D.I.C., housed at Treasury or housed at the Fed…I think it will be a no-go for the Republicans,” Shelby said.

The senior senator from Alabama’s stubborn refusal to adopt common sense consumer protections provides further evidence of the Republican Party’s prime directive: protecting the interests of large banks, corporations and the rich at everyday Americans’ expense.

Housing the proposed agency within the Federal Reserve is a watered down half-measure at best and even that’s not enough to satiate the GOP’s unquenchable thirst for obstruction.

After all, this is the same agency that turned a blind eye to the dubious derivatives trading that ultimately led to our recent financial collapse. There’s no evidence that the Fed would fair any better the second time around.

This sentiment was echoed by Senator Jeff Merkley (D-OR), who said on Wednesday, “I’d have to be convinced that the culture of the Fed has gone through some radical change,” before consenting to Dodd’s concession.

Perhaps Times columnist and Nobel laureate Paul Krugman said it best, “The only way consumers will be protected under future antiregulation administrations — and believe me, given the power of the financial lobby, there will be such administrations — is if there’s an agency whose whole reason for being is to police bank abuses.”

Passing a financial regulatory reform bill that includes both the Volcker Rule and an independent Consumer Financial Protection Agency is essential to securing our nation’s economic stability.

The statements of a former Federal Reserve chairmen, five former Treasury secretaries, a Wall Street CEO, at least one U.S. Senator and a Nobel prize winning economist all attest to this. Richard Shelby and his fellow Republicans owe the American people an explanation as to why they obtusely refuse to accept these crucial reforms.


What Happens Next

Tuesday’s Republican victory in Massachusetts proved only one thing: voters are angry. And when people are angry, they often make irrational decisions, like electing a former nude model to the United States Senate. Less than 48 hours after his unlikely win, senator-elect Scott Brown is already raising eyebrows across the nation.

In his victory speech, Brown offered up his daughters to “anyone who’s watching throughout the country.” Now, that’s family values. This bizarre incident even prompted conservative demagogue Glenn Beck to speculate that Brown’s career, “could end with a dead intern.”

The Senator-elect’s strange behavior isn’t my only reason for questioning voters’ judgment, however. Rather, The Bay State’s decision to send Brown to Washington is irrational because his statements clearly contradict the political values of those who elected him.

The sentiment I’ve heard expressed most often by disgruntled tea partiers is animosity directed at “too big to fail” financial institutions (for wrecking the economy) and the federal government (for bailing out those banks with taxpayer money). If that’s the case, they elected the wrong candidate to stick it to Wall Street’s fat cat financiers.

Martha Coakley, the defeated Democrat, enthusiastically endorsed a temporary tax on banking behemoths to recoup taxpayer losses from the TARP fund. Brown denounced this tax and vowed to vote against it in the Senate. So, I’m not sure what petulant populists gained by electing a man who openly opposes their expressed interests.

Perhaps, the reactionary wave sweeping across our country crested with Brown’s victory and the tide of hysteria is finally beginning to recede. Now that they’ve blown off some steam, maybe frustrated independent voters are ready to come back to their senses and get down to business.

Meanwhile, Democrats need to recalibrate their message. A recent NY Times article on the subject offered some useful advice. First, they need to aggressively confront Wall Street. Since the days of Andrew Jackson, Democrats have been the party of the people. They need take back this mantle by ensuring that taxpayers are made whole again.

Their strategy must also include stronger financial regulation of investment banks, especially those dealing in the exotic, derivatives market. Establishing a new Consumer Protection Agency to curb the worst abuses of the credit card industry is essential as well.

Finally, Democrats need to address our mounting national debt and budget deficit. The Bush Administration saddled us with a $482 billion deficit and the highest national debt in American history. It’s time to bring those numbers back under control and Democrats have a solid track record of doing so. After all, President Clinton left office with a $230 billion budget surplus.

What happens next will determine our nation’s future. The status quo is unsustainable, especially in regard to our economic, environmental, energy and health care policies. The American People elected President Obama with a strong mandate for change. We can’t afford to let the irrational decisions of an angry mob distract us from achieving our goals.