Friday, January 22, 2010

The Volcker Rule would not have prevented the financial crisis

The bank regulation proposed is being portrayed as a shift of influence from Geithner to Volcker.

In fact, under the new regime, lending money to home buyers who are unable to pay it back, and putting 'AAA' ratings on garbage would still be possible whether you have 10 banks or 100,000 banks, or whether those banks would trade for its own account.

And let's remember, AIG was not a bank. Its counterparty risk on its credit derivatives was a lot bigger than the risk between any two banks.

What part of the Volcker Rule would constrain the White House and Congress from make awful loans (via its sponsored agencies such as Fannie and Freddie) or to improve debt rating integrity (via its chartered agencies such as S&P, Moodys, and Fitch)? What part of this new regulation will prevent a non-bank from taking really dumb risk like AIG did?


On the other hand, reducing the amount of tax revenues out of Wall Street employees and corporations is not going to be good for anyone affected by a government program. Mayor Bloomberg had a nice suggestion:
Maybe we should hold back [congressional] salaries for a decade or so and see whether the laws they pass work out.

I'd be really upset if I were the mayor of NYC, too.

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