Volcker NYT Op-Ed on bank reform

I came across this:
The phrase “too big to fail” has entered into our everyday vocabulary. It carries the implication that really large, complex and highly interconnected financial institutions can count on public support at critical times. The sense of public outrage over seemingly unfair treatment is palpable. Beyond the emotion, the result is to provide those institutions with a competitive advantage in their financing, in their size and in their ability to take and absorb risks.

As things stand, the consequence will be to enhance incentives to risk-taking and leverage, with the implication of an even more fragile financial system. We need to find more effective fail-safe arrangements.
Read the whole thing. Volcker had better watch his back.


B-Daddy said...

Thanks for the link. I agree with some of Volcker's comments, specifically about the need to prevent banks from engaging in speculative activities with funds implicitly or explicitly guaranteed by the tax payer. But he never fully addresses the too big to fail conundrum fully. I think that the only solution is to deleverage such institutions by increasing their capital reserve requirements the bigger they get. That simpler arrangement will thwart the "competitive advantage" to which Volcker alludes, because their capital costs will increase due to the need for greater reserves as they get bigger. Why can't anyone propose simple solutions?

ubu roi said...

B-Daddy, yes, that is a simple and effective solution, and that's why no one in Washington or Wall St intend to allow that to occur. Volker is right, but no one I see on the political horizon has the nuts to call for a real return to sound banking; they are going to try and leverage themselves out of this mess, and it will end in catastrophe and, likely, war.

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