Paul Volcker and the New Financial Reform

By on July 12, 2010

The N. Y. Times features a lengthy article by Louis Uchitelle regarding the repeal of the Glass-Steagall Act in 1999 which was backed by the Clinton administration and Alan Greenspan, and the recent championing of financial reform by Paul Volcker, which has been subsequently watered down.

Some excerpts:

Mr. Volcker says that most of the deregulation came after he left the Fed. His reluctance to deregulate contributed in part to his departure under pressure from the Reagan administration. His replacement, Alan Greenspan, openly campaigned to weaken and finally repeal Glass-Steagall, and President Bill Clinton signed the repeal into law in 1999.

Although Mr. Volcker opposed the repeal, he didn’t go public with his concerns. “It is very difficult to take restrictive action when the economy and the financial markets seemed to be doing so well,” he says of his silence at the time. “But eventually things blew up.”

…..

There were other, earlier silences. Starting in the 1970s, ceilings came off the interest rates banks could place on most deposits and loans. A rising inflation rate made the ceilings impractical, and competition from unregulated money market funds was siphoning big chunks of deposits from the banks.

“The lifting of interest-rate ceilings was inevitable,” he says. “I was for doing it more gradually, but it got such a momentum that we moved the limits more abruptly than I wanted to.”

In the wake of those changes, banks were suddenly free to charge more for risky loans, and that encouraged risky lending. The subprime mortgage market grew out of this dynamic, as did the panoply of complex, mortgage-backed securities, credit-default swaps and heart-stopping leverage that finally produced the 2008 crisis.

In retrospect, Mr. Volcker regrets not challenging the widely held assumptions that underpinned much of this. “You had an intellectual conviction that you did not need much regulation — that the market could take care of itself,” he says. “I’m happy that illusion has been shattered.”

Lucitelle goes on to describe some of the intricacies of the new reform bill and the forces opposing it. Volcker rates the bill a B, while Barney Frank (a dubious character who promoted houses for everyone) gives it an A-.

SMA Comment: Congress and the financial hierarchies are infiltrated with a cadre of self-interested scumbags so getting any financial reform bill passed can be considered a victory.

Source: N. Y. Times
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