What all this amounts to is an unintended and unanticipated extension of the official “safety net”, an arrangement designed decades ago to protect the stability of the commercial banking system. The obvious danger is that with the passage of time, risk-taking will be encouraged and efforts at prudential restraint will be resisted. Ultimately, the possibility of further crises – even greater crises – will increase.

–Paul Volcker

>

Former Federal Reserve Chairman Paul Volcker is testifying before the committee on Banking and Financial Services today at 9am.

His written statement advises against a return to ”business as usual,” and makes specific recommendations as to what to do to avoid another meltdown.

• Reaffirm the principle separating banking from commerce as our approach to financial regulation;

• Regulate Derivatives as a typical financial product;

• Encourage more prudent compensation practices;

• Close existing loopholes that inevitably weaken prudential safeguards;

• Register and establish reporting requirements for hedge funds and private equity;

Volcker also notes two other key needed elements in need of reform: the Moral Hazard of the bailouts, and the ongoing policy of “Too Big To Fail.”

And, Volcker also emphasized the importance of the Federal Reserve maintaining independence from political pressures.

He also called for a new “resolution regime” for insolvent or failing non-bank institutions of potential systemic importance. Rather than toss trillions at these self-wounded entities, we should instead appoint a special “Conservator” to take control of a bank in clear danger of defaulting on its obligations.

The Conservator should have the authority to negotiate an exchange of debt for new stock to resolve the near insolvent firm, to arrange a sale or merger, or, to arrange an orderly liquidation.

This authority would preempt normal bankruptcy/reorg, justified only by the risk of systemic breakdown.

Last, Volcker emphasized the need to coordinate with other major countries on a global approach to oversight of international banking organizations.

Now that is regulatory change I can believe in . . .

>

Source:
Statement of PAUL A. VOLCKER
COMMITTEE ON BANKING AND FINANCIAL SERVICES
OF THE HOUSE OF REPRESENTATIVES
SEPTEMBER 24, 2009

http://www.house.gov/apps/list/hearing/financialsvcs_dem/volcker.pdf

Category: Bailouts

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

68 Responses to “Volcker: Reinstate Glass Steagall”

  1. Tall Paul noted that bailouts “for the largest banks and their holding companies tend to encourage greater risk-taking;” Smaller banks deemed “too small to save”, raises questions of competitive fairness; bailing out money markets creates a defacto government guarantee on these mutual funds; and lastly, the Federal Reserve support to non-banks ultimately weakens the commercial banking system?

    He also called the approach of mingling private and public responsibilities of so-called Government Sponsored Enterprises (Fannie. Freddie) a failure.

  2. scepticus says:

    What about deposit insurance? Why should taxpayers be on the line to guarantee savers a risk free return? This is distortionary and raises the cost of capital for firms beyond where it should be.

    There should be no deposit insurance on savings accounts paying interest rates higher than the fed funds rate or equivalent.

    Funny that with all this noise about moral hazard, this heinous arbitrage in favour of savours is rarely mentioned.

  3. hipster says:

    Scepticus says” “Why should taxpayers be on the line to guarantee savers a risk free return?”

    Yeah, its better that we guarantee bond and equity investors, these savors are a horrendous thorn in our society.
    Are you fucking kidding? Deposit insurance should be primary and the equity and bondholders should eat shot for the risk they take(or the risk that mgmt takes).

    You must be trying to just get comments on that foolish statement. Guess what, it worked.

  4. scepticus says:

    Where did I say that bondholders and equity holders should be protected? I didn’t.

    Earning interest on savings should entail risk.

  5. Bruce in Tn says:

    Volcker, while trying to do good, made a mistake by joining the administration. This man’s ideas would carry more weight if he were on the outside looking in. Much like Hiliary, Obama calls the shots about Israel and everything else. Volcker is merely a figurehead here. FDIC chairman says her part of the government has fallen and can’t get up

    http://www.bloomberg.com/apps/news?pid=20601039&sid=aEKc7Yh8ogXw

    FDIC Is Broke, Taxpayers at Risk, Bair Muses:

    and we see from the fed that with all the stimulus, rates must be kept insanely low for the future…or so they think…

    Our car companies are run like the government…

    http://www.msnbc.msn.com/id/32990372/ns/business-autos/

    About the fine print in GM’s refund offer …

    I suppose because they are now the government, at least by ownership.

    Some companies should do well here with government sponsorship, and those who don’t have the protective arms of government may continue to struggle mightily.

  6. torrie-amos says:

    interesting how he has hidden on the sidelines, and now is trotted out a few days before g20, if obama has any cred left, which imho is slipping…………he will get this done……..otherwise them swans they be fornicating in abandon…….so 2010 new regulations or he can kiss the white house bye bye bye

  7. danm says:

    In the grand scheme of things, the only reason why bankers get the big bucks is because they are at the top of the pyramid scheme.

    In our system, banks are theoretically there to inject money into the system. This is not very difficult, it’s a low level, low margin job. All they are doing is carrying out the Fed and the regulators’ orders, which tell them the acceptable leverage ratio.

    The second duty is to allocate this money properly and deserves much better compensation because it requires skill and knowledge. The problem is that most bankers have demonstrated zero skill in risk management.

    The only single reason why these bankers are still making huge piles of money is because they are skimming an overleveraged system. It’s all about economies of scale, the Wal-Martization of the credit market. But the difference is that on top off economies of scale benefit, they’ve actually been able to charge huge fees for deals that destroy our economies slowly but surely.

  8. call me ahab says:

    scepticus-

    you have a good point- if you get interest some amount of risk should be expected and would be the trade off

    Regarding finance reform- my opinion- is a heavy hammer need to come down- without that these banksters will do as they please-

    that they are investigating BofA is a start- but should be industry wide- nothing would scare these “masters of the universe” more than the certitude of jail time- best way to instill that fear is by very clear action against those who committed fraud and theft in the latest financial industry bacchanalia

  9. Bruce in Tn says:

    But some really wonderful news this morning…an AIDS vaccine may be at hand!

    Gonna be a good day.

  10. danm says:

    Nothing will get fixed until the easy money stops. And this means lower leverage. Ain’t gonna happen without a shock.

  11. scepticus says:

    “you have a good point- if you get interest some amount of risk should be expected and would be the trade off”

    Yup. The people of iceland are now on the hook for a decade or more to payback a huge loan the UK governmnet made to them so they could honour the deposit insurance obligations they had to thousands of UK savers who had been getting 7% interest in ‘Icesave’ accounts.

    I’m not saying that these retrospective commitments should not be honoured this time round, but in reforming the system we need to give this aspect some serious thought. Deposit insurance is one plank of a ponzi scheme.

  12. scepticus says:

    What’s easy money? Low rates or crappy underwriting standards?

  13. danm says:

    What’s easy money? Low rates or crappy underwriting standards?
    ——–
    Leverage of 30-40X when rates are at all time lows!

  14. scepticus says:

    Would 30X leverage be OK with rates at 10%?

    Low rates make sense for economies with very low growth. The leverage is an underwriting and risk appetite issue, driven by various moral hazards and skewed expectations including but not limited to deposit insurance. The moral hazards need to be removed, but I don’t see why that should change rates.

  15. [...] Greatest Fed Chariman of All Time Paul Volcker would reinstate Glass-Steagal Act to fix banks.  (TheBigPicture) [...]

  16. [...] forthcoming – not on healthcare or in financial services. Am I wrong here?  After all, Paul Volcker is singing another tune. Please tell me how you see [...]

  17. phb says:

    Off topic and I am sorry – But can somebody tell Warren Buffet to shut-the-F-up? Now he is hawking suits? AHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHHH

  18. To Scepticus:

    Related to deposit insurance comment. Can you please review my solution to this issue? Please follow link:

    http://seekingalpha.com/article/160269-a-radical-solution-for-america-s-insolvent-financial-system

  19. VennData says:

    GOP will fight this every step of the way.

    They said the stimulus would make things worse, they were wrong.

    They said the tiny Clinton tax hikes would cause a recession in’92, they were wrong.

    They said Bush’s tax cuts for the rich would pay for themselves, they were wrong.

    Republicans voters need to open their minds to the con job being pulled on them every single day by the Fox News’ et al of the world that won’t show the President’s address on health care, then complains that he won’t show on on their network “talking head” show to pitch it. You’re being lied to GOP voter. You’re being ‘Joe Wilsoned’ back to the Stone Age

  20. Starting with common sense is a much welcome first step …

  21. bdg123 says:

    Only profligate politicians could ever sit around and dream up all of the new financial regulation we need to restore sanity to our financial system. All these crooks really need to do is restore all of the regulation that they were paid handsomely to dismantle over the past thirty years. That includes dozens of laws including those that govern interstate banking – another key contributor to this f’ing mess.

  22. manhattanguy says:

    Bernanke is going to look as stupid as our former president for calling out Victory sign too early.

    ——————————————————————————————
    Bernanke is wrong! The Economy Is Getting Worse, Not Better, Schiff Says

    http://finance.yahoo.com/tech-ticker/article/342659/Bernanke-Is-Wrong!-The-Economy-Is-Getting-Worse-Not-Better-Schiff-Says?tickers=^DJI,^GSPC,SPY,DIA,TBT,UDN,GLD&sec=topStories&pos=9&asset=&ccode=

  23. bdg123 says:

    By the way, it’s not just the Republicans that are conning people back into the Stone Age. How the hell does stimulus put on our credit card make the economy better? It stabilized the economy so that we didn’t collapse. Obviously something any sane person would support. But that’s a little like putting a stent in a patient that needs a new heart. And no one in the Democratic party has done anything to move the ball forward on the new heart. Both parties are run by elitist crooks. And Clinton’s tax policies were irrelevant because he unleashed the hounds of hell on the economy and started this crisis with half a dozen major policy decisions. So, of course higher taxes didn’t have any impact. He had unleashed the crooks to make money at such a rapid clip that higher taxes could never have offset the dynamics he put into place. Clinton was the worst President in the history of the United States as measured by these policy decisions.

  24. contrabandista13 says:

    Volker is correct and we should heed his words. However, both you and I know, that it ain’t gonna happen.

    Start by replacing Githner and Summers with Volker and Co.

  25. Had Enough says:

    @Barry:

    I agree.

    Individuals like Paul Volker, Ron Paul and Elizabeth Warren are probably the best advocates we forgotten men down here in general admission are going to get in the discussions that inevitably decide the fate of our “democratic” nation – negotiations which, unfortunately for us, always seem to take place in the box seats and balconies of our economic system where most of us are forbidden to enter.

    It is a shame that brave individuals who refuse to keep quiet to cover their professional asses and persist in bringing up calls for changes to be made or back initiatives that appear “unproductive” for those whose point of view really counts in the formation of our political agenda will be thoroughly scrutinized for faults and summarily derided and/or ignored by the MSM, lackeys of these moneyed interests.

    I fear that very soon we may see Volker disappear from public view, or suddenly notice comments about him like, “too old to be effective,” “harboring out of date views,” or perhaps like Ron Paul, “some kind of nut,” “an anti-bank crackpot,” being bandied about the MSM.

    @scepticus

    “Earning interest on savings should entail risk.” Should it? Even for the ordinary saver? As long as our banks and government can cooperate to debase the currency, as they regularly have been since this country started, don’t you think that in the name of protecting our very hard won liberty we should offer the ordinary American at least one mechanism by which he can protect the value of his surplus from hard work without having to bet it in a F-ing casino such as are the securities or real estate markets? Will we not at least respect the sanctity of his right to enter into profitable contract and not abridge it by denying him any type of surety for his investment? How will you begin to arrange the financial system in such a way as to avoid jeopardizing this type of individual’s material security from the thieves who gain from inflation?

    Who or what are you trying to encourage by your assertions that will result in a higher good for the many, which must necessarily be forever the only implied principle proposition on which any sound argument made for the benefit of a democratic republic like the one we’re supposed to have, is to be predicated.

  26. Robespierre says:

    scepticus-says

    What about deposit insurance? Why should taxpayers be on the line to guarantee savers a risk free return? This is distortionary and raises the cost of capital for firms beyond where it should be.

    As long as the banks are allowed to lie about their liabilities there is no way to asses risk therefore savers can not make a rational decision on where to put their money. Moreover, the interest paid on saving/checking accounts is indirectly control by the FED so the “distortion” is already there. Take out corruption impose full disclosure and then and only then you can push for the insurance to go away. BTW do you have flood insurance on your house?

  27. Marcus Aurelius says:

    If we are going to keep the central bank at all — especially in light of the warnings of our past leaders and of the bankers themselves (http://www.gemworld.com/US-Quotes-Bank.htm) — we should probably hang the sword of Damocles over their heads.

    The penalty for poor performance should outweigh the potential for profit and/or power by a significant measure.

    While we’re at it, penalties for elected or appointed officials who are found to have abused their positions or to have practiced corruption in the exercise of the powers of their office (“corruption” assuming criminality), should be treble the punishment a simple citizen would receive for the same crime.

    Potential risk must outweigh potential reward.

  28. Marcus Aurelius says:

    bdg123 Says:

    “And Clinton’s tax policies were irrelevant because he unleashed the hounds of hell on the economy and started this crisis with half a dozen major policy decisions.”
    _________

    Please list these six policy decisions you lay at Clinton’s feet.

    Clinton F’d up when he decided that bipartisanship was the way to go. He brought a knife to a gun fight.

  29. Cunning Linguist says:

    Bah. They trot out Volker to lend gravitas, then continue to ignore him…..

  30. scepticus says:

    Robspierre you’re making the assumption that the fed sets rates. Doesn’t the fed in general follow the market?

    http://www.financialsense.com/Market/wood/2007/0907.html

    Apart from that I agree with what you said. Transparency is critical, at least for retail banking which matters to real people.

    I think you’d have to admit though that deposit insurance encourages innappropriate risk taking by banks.

  31. The Curmudgeon says:

    “…otherwise them swans they be fornicating in abandon…….”

    He he…that provides a nice visual for my mind’s eye that pretty much sums up where we are….and the thing is, we’re feeding them swans with the “accomodative” Fed. They can fornicate with abandon because they don’t have to worry about their next meal.

  32. HCF says:

    @scepticus:

    I don’t think we should remove deposit insurance, but I do agree about the moral hazard implications. Any backing of money market funds from government should be eliminated. Deposit insurance should be rolled back to 100k per account, but indexed to inflation. Every average American is entitled to SOME protection (we sure pay for it), and preventing bank runs is good, but no way the great majority of people need more than 100k or so of protection. Past that, we’re just subsidizing people who should pay for their own protection.

    HCF

  33. HCF says:

    Incidentally, does anyone know what % of American actually exceed 100k per FDIC insured account? I would reckon that the percentage is actually pretty low…

    HCF

  34. Marcus Aurelius says:

    HCF:

    If I’m not mistaken, the upper limit of FDIC insurance is now $250K.

  35. manhattanguy says:

    I am going long Gold, $DGP

  36. scepticus says:

    HCF like I said I don’t really have an issue with deposits earning the risk free rate (whatever that may be) being insured.

    Deposits earning higher than the risk free rate should bear the risk implied by the higher rate. Lowering the limit on the amount that can be insured makes sense too. The rate in the UK is £50K. I’d be inclined also to put a lower limit on the amount that can be insured at any one institution – so say £10K max in any one bank, with a total limit of £50K overall. Not sure how that would be handled administratively though.

  37. crosey says:

    I believe that Mr. Volcker is on the team for his significant international relationships and influence. It does not appear that his counsel and guidance is being heeded by the administration, at least at this time, in a substantive way.

    A shame. Referring back to BRs comments about Bush’s opportunity to reform after 9/11, I think the Obama is missing a similiar opportunity. How often do you get such ripe “political” opportunities?

    Unfortunately, a runaway train, most often, derails.

  38. The Curmudgeon says:

    @MA…correct, it is $250,000, which means, outside of small businesses that are too small to save, not much of anyone has any deposit risk, which means banks are really just quasi-government agencies, charged with facilitating transactions and doling out money, which means there is great moral hazard, e.g., the private profits/public risk underwriting of the gse’s. That didn’t work out so well. Neither are things working out so well for the rest of the banking industry, or the taxpayer that underwrites their bad decisions.

  39. HCF says:

    @Marcus:

    I know that the FDIC limit is 250k, but I can see how my posts above make me seem ignorant of that =)

    My question is more about whether raising the limit for 100k to 250k really helped the “average” American household… My point is that, very few Americans needed FDIC insurance to go up. Most people are cash poor, and those with >$100k in cold hard cash have maybe 2-5 accounts and/or banks to spread it around over. I think it’s only when you get over a few million in cash, that you really start caring about whether FDIC protection is 100k, 250k, etc.

    HCF

  40. Marcus Aurelius says:

    HCF:

    thanks for the clarification. Most people aren’t at the limit, or near the limit (especially now that the RE bubble has burst).

  41. HCF says:

    @ scepticus:

    I agree with you philosophically that deposit insurance is perverse in terms of its moral hazard implications. Perhaps the best system should be as you say: a relatively low limit on “risky” cash deposits (i.e. above the “risk free” rate) and perhaps a much higher limit on zero interest or “risk free” deposits. Small businesses would probably need to put most of their assets into the latter…

    HCF

  42. HCF says:

    @Marcus:

    Too bad the data seems hard to track down… I agree that very few individuals exceed FDIC limits, especially when you exclude “transient” cases, i.e. people who temporarily park $250k in checking because they sold a house and plan on closing on the new one soon.

    HCF

  43. DeDude says:

    Deposit insurance is needed to prevent bank runs at the time society can least afford such a run. The payment for it is part of the spread between what you get on your savings and what banks charge for loans (so you can either say it costs the costumers or the banks to get that security). The problem is that the insurance company (FDIC) was not capitalized to deal with a crisis, and that is something that should be fixed. For now the FDIC should simply get a loan from the treasury and pay the exact interest on that loan that is given on the treasuries taken out to raise the money – that meand no cost to the taxpayers. In the long run they have to not just pay that money back, but build a reserve of funds that is sensible relative to the risk they are insurring.

  44. leftback says:

    Marcus:

    The high-end RE bubble hasn’t burst yet, and when it does it will be more fun than when the Marshmallow Man exploded on Ghostbusters. Couldn’t happen to a nicer social stratum.

  45. beaufou says:

    DeDude
    “The problem is that the insurance company (FDIC) was not capitalized to deal with a crisis”

    The deal the FDIC just made to borrow from “healthy” banks probably include burying the higher fees they wanted to charge them not so long ago.

  46. AmenRa says:

    That’s one hell of a bid under the USD. I guess it had been too close to $76 long enough. They finally pushed gold back under $1000 (for now). I assume a falling dollar would have been the primary focus of the G20 meeting and have weakened our hand.

    If this keeps up we’ll have a daily TLB reversal for the SPX. Weekly TLB is still trending up.

  47. DeDude says:

    “I think you’d have to admit though that deposit insurance encourages innappropriate risk taking by banks”

    And how the heck do you get to that conclusion? The banks go under with or without the FDIC being there to save the small savers. The bankster who took the risk goes to the nice little island where he deposited his fat bonus checks from the previous years of “high risk high gain” operations, and he live happily ever after, regardless of the FDIC existence or not. The only thing that encourages risk taking is the distorted incentives of those who run the banks. And the small savers do not have the ability to evaluate that risk on their own, so they cannot drive the almighty sacred “market forces” to stop the banksters.

  48. HCF says:

    @DeDude:

    I agree with you that deposit insurance is necessary to prevent bank runs and to protect the small savers. The question is what level is appropriate. For me, I think the old limit of 100k was appropriate (though it should be indexed to inflation). My guess is that the average American family has less than 100k of liquid, cash net worth. For those who have a few times that amount, it shouldn’t be a huge burden to spread their money across a few accounts or a few banks. For those with significantly more cash than that, you have enough money that you don’t need too much protection guaranteed by Uncle Sam (or rather, Aunt Sheila)!

    HCF

  49. hr says:

    “Now that is regulatory change I can believe in . . .”

    Does President Barack Obama believe this?

  50. scepticus says:

    “The banks go under with or without the FDIC being there to save the small savers. ”

    That hasn’t happened – yet.

    I think mum + dad savers are quite capable of understanding that account A earns 0.25% and is insured, and that account B earning 4% is not insured. Now that we have had some bank failures, the difference between these two accounts would not be lost on even the dumbest of people.

    For uninsured accounts, it would make sense to convert their deposit into equity in the failed instituion alongside the bondholders.

  51. The Curmudgeon says:

    Dedude, it’s called “moral hazard”, and of course, anytime there is government underwriting of bad risk management, it will result in a surfeit of bad risk management, ie., inappropriate risk taking. The way it works in this instance is that depositors (under $250,000k) have no need to evaluate the risk level of the enterprise in which they are depositing their money. They just deposit/lend to the banks (a deposit is a loan to a bank), knowing full well the government’s got their backs. The banks then lend out the money loaned to them by the depositors. If they know the depositors won’t and don’t have any reason to leave even if they’ve built one too many Miami condos with their money, then they’ll just build another. That’s the moral hazard, and that’s why it compels poor risk management, and is why the FDIC very diligently tries to stay abreast of what sort of chicanery the banksta’s are up to. The FDIC inevitably falls short, sorta how the NCAA and NASCAR will never be able to keep up w/ the myriad and imaginative mechanisms people can devise for cheating.

    IMO, the FDIC should have lowered, not raised, the limit on insured deposits–maybe something like $50,000, so that it could protect the financially unsavvy while imposing the requirement for diligence on the small to middling businesses that were the main beneficiary of the increase, who are also one of the main customers for loans made from those deposits.

  52. Marcus Aurelius says:

    leftback:

    RE: high-end RE crash.

    We know it’s coming. I can’t wait. Even if it kills me financially (by proximity, not because I hold high-end, over leveraged RE), I want it to happen. Hard-learned lessons stick with people. The fascist system Denninger keeps warning us against must fail. I don’t care for slavery (and as I’m not one of the arrows in the fascia, I must be a slave).

  53. willid3 says:

    Robespierre Says:
    September 24th, 2009 at 9:33 am

    scepticus-says

    What about deposit insurance? Why should taxpayers be on the line to guarantee savers a risk free return? This is distortionary and raises the cost of capital for firms beyond where it should be.

    the main reason we have deposit insurance is to keep bank runs low (old days all it took was a rumor to kill any bank). and that insurance was paid for by the banks paying premiums to the FDIC. problem is for many years I am sure that banks pushed to have that premium amount kept artificially low. and never mind ignoring the risks they were running and not admitting too. and add on to that they ratings agencies dereliction of duty. and you get a FUBAR

  54. Onlooker from Troy says:

    I strongly agree with the suggestion that we need to restrict the rate that banks offer on insured accounts to reduce the moral hazard. There’s clear evidence that failing banks have been trotting out higher than average rates to lure in money with the backing of the FDIC’s guarantee. People aggressively chasing those higher rates, unconcerned with the health of the bank, of course.

    Countrywide, WAMU and many others did it and this helped increase the liability to the FDIC fund, which raised the exposure to banks who didn’t run their businesses poorly and with high risk, and ultimately exposes the taxpayer as the backer to all of this.

    The FDIC does ostensibly step in to limit that practice, but they clearly did not do so very aggressively in the past. They just need to tighten up on that to keep the exposure down. Money market mutual funds were largely developed to provide a slightly higher rate of return for cash savings with no guarantee. But now we’ve backed them with a govt guarantee, establishing a precedent that will be very hard to reverse. Moral hazard abounds.

  55. Moss says:

    @LB
    Couldn’t happen to a nicer social stratum

    Hip Hip Hooray! Too bad Reagan and Thatcher are not around to see the era they ushered in disintegrate.

  56. [...] Paul Volcker’s recommendations to avoid another meltdown.  (Big Picture) [...]

  57. Had Enough says:

    @Onlooker from Troy:

    Why must you and the others persist with the FDIC thing? The earlier reasonable limit of US$100k is hardly asking for much, considering the risk to which government and banks are already subjecting Average Joe by obligating him to earn Treasury toilet paper promissory notes and keep them as a store of future value in their chartered monopolies. Really, it is the very least they could do for him. And if the deposit insurance presents any moral hazard for the average voter, who is the only party supposed to count in this equation (its called a democracy), it is only the risk he will have to bail himself out if things go awry. This way he will get what he is paying for in tax with the insurance and the inflation hedge received on his deposit.

    Any BS bad debt in excess of the real deposits from earnings lent by banks is the responsibility of the various private parties involved, who should be bound according to the language of the contracts into which they willingly entered and for which should be held individually financially accountable without recourse to small depositors funds or tax money. This is so obvious that a child could readily understand.

    As for money market funds… What SAFE alternative will you offer to Average Joe to store value in his 401k or IRA, now that his employer has no pension plan? Or would you have him hitch his cart to the Wall Street wheel of fortune even if he prudently wishes to resist?

    @Moss:

    Assuming the Big Gipper could still remember who he was or where he was, no doubt he’d be on tour with Greenspan to promote his newest addition to the great conservative cannon, explaining away the ugly train wreck of late 20th Century American political ideology and its failed social and economic policies… He will cry about how warned us yet no one listened, he’d taken all precautionary steps to ensure success, done everything in his power… bla… bla… and finish on a salutary note with the old chestnut about “emphasis on education – the key to America’s future prosperity in the global economy” and his “faith in the most productive, kindest, most generous, God-fearin’ people on Earth. Amen.”

  58. TraderMark says:

    This gives us hope .. for a day. sometimes two

    then everything back to normal.

  59. flipspiceland says:

    Volcker is vaunted as some kind of guru, but I beg to differ.

    He also said that taking powers away from the FED is not advisable.

    That did it as far as I’m concerned. Anyone who thinks Bernanke or Greenspan is competent, has done a yeoman’s job and disregards their prior monumental policy errors (and there are some here who think so) the FED needs to be exposed, flayed and slain. At the very least, not empowered even more.

    The FED is acting in the interests of only a precious few. If you are part of that tiny fraction of the whole, good on ya. But for Volcker to think the power of the FED needs enhanced tells me that there is only one segment of society he gives a hoot about. And those people don’t need one more red cent.

  60. DeDude says:

    Since when did insurance become moral hazard? Insurance is something that you have to protect against problems you have little or no influence over. The regular mom&pop saver have no influence over what the banksters do – and no way of understanding or predicting if the banksters actions will run the bank to the ground. If anybody think that regular mom&pop savers can go through the books of their banks and actually evaluate the risk that bank is taking, they must be from another planet. So government should force the banks to have insurance on deposits from small savers. No different than forcing people to have liability insurance on their cars; when your reckless behaviour hurt someone else the victims will be compensated.

    As far as I can see there is no government subsidy if the system is run as it should be (charge enough for the insurance to cover the cost). There wouldn’t be any either even if the government lends the FDIC some money as iong as the cost is covered by the interest government charges for that loan. The expanded limits hopefully soon will be getting down to the regular 100K although the difference is mostly the inconvenince to those who want to have more than 100K held in cash deposits.

    The true moral hazards is to allow the FDIC to borrow money from the same banks that it is regulating. That is absolutely absurd if you do even the most basic incentive analysis, and criminal if you turn your brain on. What the FDIC should be doing is to charge a variable rate to banks and make it a lot more expensive to insure deposits in banks that engage in riskier behaviour. That way you can align institutional incentives with risk.

  61. DeDude says:

    Scepticus; if the bank goes under it is not going to cover the deposit on an uninsured account whether it pays 0.25% or it pays 4%. Either accounts are insurred or they are not insurred. If you are talking about allowing banks to set up uninsured accounts then take a look at the mortgage market. Lots of people got lured into adjustable mortgages that they had been told (by that nice lady) were fixed rate. If you allow banksters the ability to defraud regular people, they will do it.

  62. bdg123 says:

    I’d rather you live on your high horse thinking I don’t know what I’m talking about and let you figure out yourself that Clinton’s policies are the primary cause of this collapse since you appear deluded by believing Clinton was some great President. It’s obvious you are as deluded as the rest of the Clinton supporters. He and Bush are indistinguishable.

  63. Thor says:

    bdg123 – Is that seriously your response to MA? “look it up yourself” “you’re deluded”

    Make your case. Or are you here only for the “Rantings”. I’d imagine you have your own blog for that.

  64. Assassin says:

    “Deposit insurance should be rolled back to 100k per account, but indexed to inflation.”

    Acknowledging that insurance should be indexed to inflation, while desiring a return to the old limit, seems a bit contradictory. It had been 100,000 since *1980*. Just to keep up with inflation, it would need to be around 235,000 currently for the insurance to provide the same effective amount of protection. And 250k is close enough to 235k. To advocate a return to 100k is to pretend that inflation hasn’t happened for 29 years. Or do you believe that the 100k limit was too high when first instituted?

  65. danm says:

    scepticus Says:

    Would 30X leverage be OK with rates at 10%? Low rates make sense for economies with very low growth.
    —————————–
    First of all…
    With your logic, 30X at 10% is way better than 30X at 0% because when rates are 10% then you know that at 10% there will be more growth to support the repayment of the debt.

    Now for my view…
    Yes, 30X leverage at 10% is better than 30X leverage at 0%.

    At 30x leverage and rates at 10%, they are way above the historical norm, meaning that they could potentially come down, boosting valuations and making it easier to repay the debt.

    At 30X leverage in a zero rate environment, chance are rates will go up, lowering valuations an making harder to repay debt.

    Basically as rates go to zero, regulators should make sure that leverage goes down, not up.

    Future repayment of debt depends on future growth and if that growth is not there, the loans are risky because they will default.

  66. Thor,

    like this: http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Clinton+Bush+Mena+CIA for starters..

    bdg123 is correct, 41, 42, 43, all Peas from the same Pod..

    now, all ‘Hope’ and ‘Change’ and ‘Si! Se Puede’ aside, 44 is more of the same..
    ~~
    fsl @13:47 makes a good point.
    further: http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Volcker+CFR+Trilateral+Commission

  67. [...] harder to close banks, or even approach the terms of doing so, when they are combined entities. To echo Volcker, we have a safety net on commercial banking for a reason, and allowing investment banking to access [...]