On January 21, 2010, President Obama announced the "Volcker Rule." The details of the so-called Volcker Rule have not been disclosed, but based on the President's comments, banks with federally insured deposits would be prohibited from owning, investing or sponsoring hedge funds and private equity funds. President Obama also called for new caps on the size of banks and preventing banks and bank holding companies from engaging in proprietary trading. The Democrat proposal is being touted as necessary to prevent financial turmoil and bailouts in the future, but the proposal is terribly misguided and irresponsible.
The nation's current financial turmoil was not caused by proprietary trading by banks and bank holding companies. Rather, the financial turmoil is a direct result of decades of government meddling in the marketplace and bad housing policies. The Volcker Rule would not have prevented Fannie Mae, Freddie Mac, AIG, GM and Chrysler from failing. The Volcker Rule would not have prevented banks from abandoning sound underwriting standards. The Volcker Rule would not have prevented the government sanctioned credit rating cartel from misleading investors and abandoning its responsibility to provide accurate, transparent assessments of risk. The Volcker Rule would not have prevented the reckless managements and boards of directors of the two failed GSEs, Fannie and Freddie, from exploiting their congressionally granted duopoly status to benefit from privatized profits earned against socialized risks taken.
ISSUES OF CONCERN:
Kills Jobs: Like H.R. 4173, the Democrats' TARP II Plan, the Volcker Rule would authorize the federal government to determine when a bank or bank holding company is or is becoming "too big to fail." After such determination, government bureaucrats would have the authority to break up the firm, even if the firm is financially healthy and well managed. Such arbitrary power could have a devastating impact on the nation's economy and destroy American jobs. Additionally, the Glass-Steagall Act already restricts the activities of banks, including securities dealing, due to their government insured deposits. However, bank holding companies are not federally insured, but would be forced to either stop their proprietary trading businesses, even though their activities are protected from the bank, or sell off the bank to foreign competitors. This slippery slope would put insurance companies next in the Democrats' line of attack.
Increases Power for Undeserving Bureaucrats: The Federal Deposit Insurance Act, among other authorities, already provides regulators the power to restrict the growth of a bank if it is engaging in unsafe and unsound practices. However, those current powers have not been effectively exercised. For example, the regulators of Countrywide, IndyMac, Wachovia, Washington Mutual and even AIG had a complete arsenal of regulatory enforcement tools at their disposal. On March 20, 2009, CBS News reported, "[Acting director of the Office of Thrift Supervision] Polakoff's testimony admitted that OTS focused too narrowly in some areas of AIG's business, and neglected others. It did not foresee how risky credit default swaps would be, he said, and relied too heavily on history to judge future risks. In short, Polakoff seemed to be indicating that the career civil servants at OTS had the expertise, manpower, and regulatory authority...to rein in AIG-before it engaged in excesses that led to a taxpayer-funded bailout."
Restricts Competition: Rather than promoting healthy competition, the Volcker Rule would put American banks at a competitive disadvantage when compared to Asian and European banks. On January 24, 2010, the UK Times, quoting Chancellor of the Exchequer, Alistair Darling regarding the Volcker Rule stated, "If everyone does their own thing it will achieve absolutely nothing. The banks are global-they are quite capable of organising themselves in such a way that if the regime is difficult in one country they will go to another one..."