Volcker’s Voice Fails to Sell a Bank Strategy
New York Times
By LOUIS UCHITELLE
October 20, 2009

Listen to a top economist in the Obama administration describe Paul A. Volcker, the former Federal Reserve chairman who endorsed Mr. Obama early in his election campaign and who stood by his side during the financial crisis. “The guy’s a giant, he’s a genius, he is a great human being,” said Austan D. Goolsbee, counselor to Mr. Obama since their Chicago days. “Whenever he has advice, the administration is very interested.” Well, not lately. The aging Mr. Volcker has some advice, deeply felt. He has been offering it in speeches and Congressional testimony, and repeating it to those around the president, most of them young enough to be his children.

He wants the nation’s banks to be prohibited from owning and trading risky securities, the very practice that got the biggest ones into deep trouble in 2008. And the administration is saying no, it will not separate commercial banking from investment operations. “I am not pounding the desk all the time, but I am making my point,” Mr. Volcker said in one of his infrequent on-the-record interviews. “I have talked to some senators who asked me to talk to them, and if people want to talk to me, I talk to them. But I am not going around knocking on doors.”

Still, he does head the president’s Economic Recovery Advisory Board, which makes him the administration’s most prominent outside economic adviser. As Fed chairman from 1979 to 1987, he helped the country weather more than one crisis. And in the campaign last year, he appeared occasionally with Mr. Obama, including a town hall meeting in Florida last fall. His towering presence [he is 6-foot-8] offered reassurance that the candidate’s economic policies, in the midst of a crisis, were trustworthy.

More subtly, Mr. Obama has in Mr. Volcker an adviser perceived as standing apart from Wall Street, and critical of its ways, some administration officials say, while Timothy F. Geithner, the Treasury secretary, and Lawrence H. Summers, chief of the National Economic Council, are seen, rightly or wrongly, as more sympathetic to the concerns of investment bankers. For all these reasons, Mr. Volcker’s approach to financial regulation cannot be just brushed off — and Mr. Goolsbee, speaking for the administration, is careful not to do so. “We have discussed these issues with Paul Volcker extensively,” he said. Mr. Volcker’s proposal would roll back the nation’s commercial banks to an earlier era, when they were restricted to commercial banking and prohibited from engaging in risky Wall Street activities…

The Obama team, in contrast, would let the giants survive, but would regulate them extensively, so they could not get themselves and the nation into trouble again. While the administration’s proposal languishes, giants like Goldman Sachs have re-engaged in old trading practices, once again earning big profits and planning big bonuses. Mr. Volcker argues that regulation by itself will not work. Sooner or later, the giants, in pursuit of profits, will get into trouble. The administration should accept this and shield commercial banking from Wall Street’s wild ways…

Over the period between the Crash and the 1932 election, there had been recurrent runs on various Banks around the country, and a number of Banks had gone under. In the "lame duck" period between F.D.R.’s election and his inauguration, there was a big run on the Bank in Detroit in anticipation of his inauguration. Bank Runs were the target of his famous inaugural quote, "We have nothing to fear but fear itself." On the day after his Inauguration, he declared a Bank Holiday, shutting down the runs on Banks in their tracks and putting some teeth into his inspiring words.

Banking Regulations: Within three months, Congress passed the Glass-Stegall Act [which became known as The Banking Act of 1933]. This reform legislation had two parts:

• The Federal Deposit Insurance Corporation [FDIC]: In order to put a stop to the destructive runs on Banks, the Federal Government got into the Insurance business, insuring Savings Accounts for up to $100,000 in case of Bank failure.
• The Separation and Regulation of Commercial and Investment Banks: This is the part known as regulation. Hearings disclosed obvious conflicts of interest when Banks invest money from their vast holdings in Savings Accounts. So, the Bill imposed strong restrictions on investing by these banks [Commercial Banks]. Likewise, the behavior of Banks that were involved in investing were also heavily regulated. The design here was clear, In the boom before the Crash, Banks had loaned money to people to put in the Market and had invested their assets as well. Glass-Stegall imposed restrictions to stop speculators from using other people’s money. Bank size [merger] was also regulated.

F.D.R.’s early measures marked a radical intrusion of the government into the country’s financial system and stemmed the panic and chaos of the three years since the Crash. The Stock Market came up and the Banking Indistry was stabilized.

In 1994, the Republicans won a majority in the House and Senate called "the contract with America." Except for short periods after World War II, this hadn’t happened since the Depression. The Democratic President, Bill Clinton, was under attack throughout [Whitewater, Monica, etc.]. He was finally impeached towards the end of his term for lying about his affair with a White House Intern, but not convicted in the Senate. Towards the end of his term, two Bills from the Congress finally ended the Roosevelt post-Depression regulations on Banks, and provided an end run around SEC Oversight. Both Bills were initiated by Senator Phil Gramm from Texas, who then retired from the government.

Gramm-Leach-Bliley Act of 1999:

The Gramm-Leach-Bliley Act … is an Act of the United States Congress which repealed part of the Glass-Steagall Act of 1933, opening up competition among banks, securities companies and insurance companies. The Glass-Steagall Act prohibited a bank from offering investment, commercial banking, and insurance services.
The Gramm-Leach-Bliley Act (GLBA) allowed commercial and investment banks to consolidate. For example, Citibank merged with Travelers Group, an insurance company, and in 1998 formed the conglomerate Citigroup, a corporation combining banking and insurance underwriting services under brands including Smith-Barney, Shearson, Primerica and Travelers Insurance Corporation. This combination, announced in 1993 and finalized in 1994, would have violated the Glass-Steagall Act and the Bank Holding Company Act by combining insurance and securities companies, if not for a temporary waiver process. The law was passed to legalize these mergers on a permanent basis. Historically, the combined industry has been known as the financial services industry.

This Bill essentially repealed the Glass-Stegall Act. Things were back to pre-1929-Crash conditions. Again, there was a blurring of Bank/Broker distinctions and megaBanks proliferated…

Paul Volcker "argues that regulation by itself will not work. Sooner or later, the giants, in pursuit of profits, will get into trouble. The administration should accept this and shield commercial banking from Wall Street’s wild ways."

He is, of course, correct. The only reason not to reinstate the distinction betweem Commercial and Investment Banks is to allow Wall Street access to our money to play with, essentially without our consent. Barack Obama has done a lot of correct things, but this is a mistake waiting to happen. Listen to this old man!