Volcker Op-Ed

Paul Volcker published an Op-Ed in the NYT over the weekend, describing what he thinks we need to do about regulatory reform on banks. Summary:

• Prevent commercial banks from running hedge funds and proprietary trading desks.
• Create a government-run "Resolution Authority" that can intervene and safely shut down a bank that threatens the stability of the financial system, and make sure that stakeholders such as stock-owners, management, and bondholders pay the costs of the shut down (no more public safety net, reducing the moral hazard issue).
• No arbitrary size limits (an idea Simon Johnson has championed) that would artificially prevent an institution from becoming "too-big-to-fail". Instead, as noted above, institutions that fail would do so safely and not at public cost.

I quote the conclusion of the editorial:

I am well aware that there are interested parties that long to return to “business as usual,” even while retaining the comfort of remaining within the confines of the official safety net. They will argue that they themselves and intelligent regulators and supervisors, armed with recent experience, can maintain the needed surveillance, foresee the dangers and manage the risks.

In contrast, I tell you that is no substitute for structural change, the point the president himself has set out so strongly.

I’ve been there — as regulator, as central banker, as commercial bank official and director — for almost 60 years. I have observed how memories dim. Individuals change. Institutional and political pressures to “lay off” tough regulation will remain — most notably in the fair weather that inevitably precedes the storm.

The implication is clear. We need to face up to needed structural changes, and place them into law. To do less will simply mean ultimate failure — failure to accept responsibility for learning from the lessons of the past and anticipating the needs of the future.

UPDATE: Volcker vs. Volcker.