A big chunk of rock went missing from Mount Rushmore when Paul Volcker broke away in 2008 to stand stony-faced behind candidate Barack Obama. The former Federal Reserve chairman served as a reassuring presence from an older, more orderly financial era that had been sacrificed on the altar of deregulation. Volcker has since written the “Volcker rule,” a formula for preventing another near-collapse of our financial system and accompanying government bailout.
Not that Republicans and some “moderate” Democrats profess to see it that way. Flush with ever bigger piles of cash, Wall Street has hired a legion of lobbyists to stop meaningful reform. Money can trump public anger, especially when used behind the scenes. Despite the misery Wall Street has visited on the country, the financial industry “still owns the place,” as Sen. Dick Durbin, an Illinois Democrat, famously noted. The place would be Congress.
The Volcker rule, the witty Alan Abelson explains in Barron’s magazine, would “effectively remove temptation from the banks to again behave badly by restricting their ability to act like hedge funds and forcing them to act, well, like banks — you know, taking in deposits and lending out money with something resembling prudence.”
It would also shrink banks to a size that — should their greed, stupidity or insanity drive them to the edge — lets us safely push them onto an ice floe to sail off into oblivion. In other words, the banks would no longer be “too big to fail.”
Endorsed by respected economists of all political stripes, Volcker’s approach would end Wall Street’s ability to gamble with the taxpayers’ money. That’s a pleasant thought for the taxpayers, though not for the bankers who, to this day, still enjoy an implied government guarantee of their losses.
This puts Republicans in an awkward position. Writing pithy bumper stickers designed to win sympathy for the big banks is a tall order. Republican consultant Alex Castellanos suggests saying that bank reform is “not a growth argument, it’s a punishment argument.” I don’t suggest Republicans try that.
But they, with some Democratic co-conspirators, can quietly strangle serious reform through “bipartisan negotiations.” For example, what do we mean by “too big”? The banks are no doubt passing notes to lawmakers offering some highly elastic definitions.
The political strategy is to blame Obama for the odious bank bailouts. To pull that off, you have to ignore two things. One is history. The other is reality.
Blaming Obama is hard to do, since he wasn’t president then. The bank bailout was designed by the Bush administration and backed by the Republican leadership. When the House initially rejected it, the Dow Jones Industrial Average plunged 778 points in one day, exceeding the freefall on the first day of trading after the Sept. 11 attacks. After that stomach-dropping performance on the markets, the House and Senate came around to the idea real quick.
The whole strategy rests on the argument that the banks didn’t have to be bailed out in the first place. Testing that notion was something this terrified nation did not feel like doing 18 months ago. But even if one argues today that it could have been done, wouldn’t you prefer not being asked to make that call?
So the question here isn’t whether the next time the big banks crash into icebergs, we can or can’t let them sink. The question is how to reorganize banks so that if they crash into icebergs, we don’t have to care enough to bail them out.
The Volcker rule would free Americans from such worries. That’s why we can’t let the gremlins in Guccis mess up this essential legislation. The taxpayers’ liberation is in the details.
Froma Harrop is a Providence Journal columnist. Her e-mail address is fharrop@projo.com.
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