The Volcker Rule, and You (Part II) David E. McClean, Ph.D.
November 15, 2010
As I made clear in Part I of this two part article, the banks and their lobbyists are very busy trying to make sure that the Volcker Rule is as watered down as possible, so that they can keep taking the same risks that they were taking prior to the credit crisis and the housing market collapse.
The fact that all of this seems arcane does not mean that it has no bearing on your life. The chasm between “Wall Street” and “Main Street” is illusory, even though the salaries paid on those respective “Streets” often bear no resemblance to each other. (Indeed, the illusion is part of the game.) What happens on Wall Street can make the fortunes and the quality of life of Main Street rise or fall. Wall Street, as we have seen, can cause Main Street to collapse into a financial sinkhole, which is what happened over the past few years.
However, Main Street (You) can fight back. You need not stumble about, shell-shocked, merely hoping that things get better – which is precisely what Wall Street (and its lobbyists) want you to do (because it keeps you out of the policy process, which is where the action is). You can go toe to toe with the powerful lobbyists, and win. You can throw a powerful punch when they are not looking, when they least expect it – when they think that “all of this technical talk” is above the heads of average folks. But really, it isn't.
The Volcker Rule was written to prevent future sink holes. Here is what it says:
PROHIBITIONS ON PROPRIETARY TRADING ANDCERTAIN RELATIONSHIPS WITH HEDGE FUNDS AND PRIVATE EQUITY FUNDS. PROHIBITION.— Unless otherwise provided in this section, a banking entity shall not—(A) engage in proprietary trading; or (B) acquire or retain any equity, partnership, or other ownership interest in or sponsor a hedge fund or a private equity fund.
In a nutshell, with all the definitions and cross references peeled away, this is the Volcker Rule. It’s really quite plain, but the banks fear it, and the bank lobbyists want to find in that plain language the seeds of its demise. For instance, they want to fuzzy-up what “proprietary trading” means, although the meaning is as clear as a bell. They want to fuzzy-up what “engage in” means. And it won't be long before we behold the spectacle of lobbyists taking us on a journey down memory lane, as we watch them debate with the Fed the meaning of "is."
If the bank lobbyists win, and if the risk profile of banks is set to the status quo ante, to the rampant speculation that helped to cause the worst recession in the country’s history – and what could have been the mother of all depressions – we will have taken one more giant step on the road that leads to the demise of our democracy – a step facilitated, unfortunately, by the new Republican majority in the House of Representatives, on whom the banks have pinned their hopes.
But this is not a partisan appeal. All of us, Democrats and Republicans, those with no party affiliation, and even those who may be thinking that the game is already over, need to come together on this one. It is one hill in one battle in a long war to wrest control from the plutocratic interests that are jeopardizing the country. And it is a hill that can be taken, and that is why it must be taken.
So, here’s what you can do. Below, there is a letter that you can cut and paste, and send to your senators and representatives, to the chairperson of the SEC, to the chairperson of the Federal Reserve, to the Secretary of the Treasury, and even to President Obama himself. This one letter will do it, and you should invite your friends, family and colleagues to join in. If 100,000 copies of this letter land on the desks of all of these officials, we might be able to turn back the tide.
Here it is:
The Dodd-Frank Act (the “Act”) contains provisions that are intended to reduce risks to the financial system and, ultimately, prevent the sort of national security threat that was posed, over the past several years, by the reckless activities of the various institutions that operate within it. One of those provisions is the so-called “Volcker Rule” (Sec. 619 of the Act).
The Volcker Rule makes it unlawful for banks to engage in proprietary trading and also forbids banks from taking proprietary positions in hedge funds and private equity funds. The Volcker Rule should not be permitted to be watered down in the rulemaking process. If it is watered down, the banks and the lobbyists will win, once again, and the citizens will lose, once again.
Why is this particular issue so important? Because banks, like hospitals, insurance companies, universities and transportation companies, are critical institutions. They have a special mandate which allows them to hold the deposits of ordinary citizens and businesses of all types, and to lend money to ordinary citizens and to the businesses that are needed to keep the economy strong. When banks are weakened or threatened because they make high stakes bets in the securities, commodities and derivatives markets, the nation itself is threatened. You must not let the nation go backward. Not after all we’ve been through. To prevent the Volcker Rule from being watered down in the rulemaking process, you will have to stand-up to powerful interests. But if you do, know that you are doing what is right for the country. The banks and their lobbyists will get over it, in time, and adjust to a new normal wherein they will have to behave like bankers, and not gamblers.