The most devastating part of the NYTimes piece on Paul Volcker’s lack of influence on WH economic policy comes into the very last sentence of the piece:
So Mr. Volcker scoffs at the reports that he is losing clout. “I did not have influence to start with,” he said.
Me: I can’t believe Volcker is also too thrilled with what’s been happening lately with King Dollar. Yet the focus of the story is how the WH is ignoring Volcker’s advice to separate banking from investing and trading, a de facto restoration of the 1933 Glass-Steagall Act.
Mr. Volcker’s proposal would roll back the nation’s commercial banks to an earlier era, when they were restricted to commercial banking and prohibited from engaging in risky Wall Street activities. … The only viable solution, in the Volcker view, is to break up the giants. JPMorgan Chase would have to give up the trading operations acquired from Bear Stearns. Bank of America and Merrill Lynch would go back to being separate companies. Goldman Sachs could no longer be a bank holding company. It’s a tall order, and to achieve it Congress would have to enact a modern-day version of the 1933 Glass-Steagall Act, which mandated separation.
Glass-Steagall was watered down over the years and finally revoked in 1999. In the Volcker resurrection, commercial banks would take deposits, manage the nation’s payments system, make standard loans and even trade securities for their customers — just not for themselves. The government, in return, would rescue banks that fail. On the other side of the wall, investment houses would be free to buy and sell securities for their own accounts, borrowing to leverage these trades and thus multiplying the profits, and the risks.
Being separated from banks, the investment houses would no longer have access to federally insured deposits to finance this trading. If one failed, the government would supervise an orderly liquidation. None would be too big to fail — a designation that could arise for a handful of institutions under the administration’s proposal.
Banking expert Bert Ely sees things differently:
Had Glass-Steagall never been enacted, had it been repealed much earlier than 1999 … the Big Five investment banking firms … might not have become as focused as they did on buying, securitizing, and trading subprime, Alt-A, and option-ARM mortgages. While the large commercial banking companies also engaged in mortgage securitization and originating nonprime mortgages, they did not get as deeply involved in those activities as did the investment banks. Arguably, then, had the separate, distinct investment-banking industry been melded into mainstream commercial banking years ago, today’s mortgage and financial crisis would not be as severe as it is, or may not have occurred at all.