- Why the Volcker Rule Is Now 233% Longer
- With Inflation Accelerating Around the World, Will the United States be Next?
- It's Time For "Banks" to Stop High-Risk Trading
- As Washington Turns on Wall Street, Investors Should Expect a Rough Stretch for Financial Stocks
- My Confrontation With Ben Bernanke: The One Question He Refused to Answer
- Why the Volcker Plan Doesn't Go Far Enough
- "Volcker Rule" Socks Bank Trading, Funding for Hedge funds and Private Equity
India's wholesale price index-based inflation rate in February accelerated to 9.89% from a year earlier. That was the fastest pace in 16 months, blowing past the Reserve Bank of India's (RBI) estimate for an 8.5% inflation rate at the end of March.
Soaring food prices were the primary driver of inflation. An index measuring wholesale prices of lentils, rice, vegetables and other food articles compiled by the commerce ministry rose 16.3% in the week ended March 6 from a year earlier after a 17.81% gain the previous week.
Volcker wants to make it illegal for banks to engage in such high-risk activities as "proprietary trading" - when an institution trades for its own accounts, as opposed to making trades for customer accounts. But as Volcker's comment illustrates, the proposal - known as "Volcker's Rule" - the whole concept of high-risk trading is pretty hazy and hard to define.
Just as hazy is the definition of what now constitutes a bank.
Long gone are the elegant subtleties of form and finesse that once defined the bank. In recent years, the entire concept has been cheapened by the vulgar obviousness of grossly enhanced compensation schemes.
No company better embodies this transformation than Goldman Sachs.
To find out why high-risk trading should be banned, read on...
First, the Bush administration swallowed its free-market credentials to take over Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), while handing the largest banks and the Detroit automakers big piles of taxpayer cash to keep them afloat. Then, the Obama administration resisted populist pressure to punish the bankers getting rich thanks to rising financial markets while unemployment continued to climb.
But that's changing now, and the attack dogs have been unleashed. Policy is moving from supportive (crisis management) to restrictive (crisis prevention and the scoring of political points) at a faster pace and to a much-more-severe degree than many imagined.
It started with extra taxes on bank liabilities to fund a reserve for financial crises, then moved to include a congressional commission to review the causes of the financial crisis, and then to more onerous regulatory oversight. But now it's growing into something more. And that's one big reason stocks in general and the financial sector in particular sold off so severely.
I didn't waste any time. After introducing myself, I showed him a copy of the talk he gave at the American Economic Association (AEA) meetings in January 2007. I circled all the times he used the words "panic," "crisis," and "stress" in his speech, entitled "Central Banking and Bank Supervision of the United States."
A total of 36 occasions.
I asked him point-blank: "Did you know in advance that a financial crisis was headed our way?"
He looked nervous. I could tell he was uncomfortable with my question. He looked at me stoically and smiled.
And he refused to answer.
But there was no doubt in my mind what the correct answer was. I think he was worried about his job if he said, "Yes."
I made both those recommendations in my forthcoming book "Alchemists of Loss" (Wiley 2010). The book, written jointly with Kevin Dowd, a British finance professor, should debut sometime late this spring(we sent the manuscript to the publisher last weekend - what a relief!). But after I studied the Obama plan further, I realized that I shouldn't have been surprised - the idea's sponsor was former U.S. Federal Reserve Chairman Paul A. Volcker.
At its heart, the plan would fundamentally change the banking industry, separating commercial banks from investment banks, a line that was muddled over a decade ago by the repeal of the Glass-Steagall Act.
"Never again will the American taxpayer be held hostage by a bank that is too big to fail," Obama said Thursday.
Obama announced the plan with former U.S. Federal Reserve Chairman Paul Volcker at his side. Volcker has been stumping for months for increased regulatory control, and the President credited him for the plan's design, dubbing it the "Volcker Rule."