Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Gold Prices Investors beat Central Banks and Jewelry, as having the most Impact - 18th Jun 21
Has the Dust Settled After Fed Day? Not Just Yet - 18th Jun 21
Gold Asks: Will the Economic Boom Continue? - 18th Jun 21
STABLE COINS PONZI Crypto SCAM WARNING! Iron Titan CRASH to ZERO! Exit USDT While You Can! - 18th Jun 21
FOMC Surprise Takeaways - 18th Jun 21
Youtube Upload Stuck at 0% QUICK FIXES Solutions Tutorial - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations Video - 18th Jun 21
AI Stock Buying Levels, Ratings, Valuations and Trend Analysis into Market Correction - 17th Jun 21
Stocks, Gold, Silver Markets Inflation Tipping Point - 17th Jun 21
Letting Yourself Relax with Activities That You Might Not Have Considered - 17th Jun 21
RAMPANT MONEY PRINTING INFLATION BIG PICTURE! - 16th Jun 21
The Federal Reserve and Inflation - 16th Jun 21
Inflation Soars 5%! Will Gold Skyrocket? - 16th Jun 21
Stock Market Sentiment Speaks: Inflation Is For Fools - 16th Jun 21
Four News Events That Could Drive Gold Bullion Demand - 16th Jun 21
5 ways that crypto is changing the face of online casinos - 16th Jun 21
Transitory Inflation Debate - 15th Jun 21
USDX: The Cleanest Shirt Among the Dirty Laundry - 15th Jun 21
Inflation and Stock Market SPX Record Highs. PPI, FOMC Meeting in Focus - 15th Jun 21
Stock Market SPX 4310 Right Around the Corner! - 15th Jun 21
AI Stocks Strength vs Weakness - Why Selling Google or Facebook is a Big Mistake! - 14th Jun 21
The Bitcoin Crime Wave Hits - 14th Jun 21
Gold Time for Consolidation and Lower Volatility - 14th Jun 21
More Banks & Investors Are NOT Believing Fed Propaganda - 14th Jun 21
Market Inflation Bets – Squaring or Not - 14th Jun 21
Is Gold Really an Inflation Hedge? - 14th Jun 21
The FED Holds the Market. How Long Will It Last? - 14th Jun 21
Coinbase vs Binance for Bitcoin, Ethereum Crypto Trading & Investing During Bear Market 2021 - 11th Jun 21
Gold Price $4000 – Insurance, A Hedge, An Investment - 11th Jun 21
What Drives Gold Prices? (Don't Say "the Fed!") - 11th Jun 21
Why You Need to Buy and Hold Gold Now - 11th Jun 21
Big Pharma Is Back! Biotech Skyrockets On Biogen’s New Alzheimer Drug Approval - 11th Jun 21
Top 5 AI Tech Stocks Trend Analysis, Buying Levels, Ratings and Valuations - 10th Jun 21
Gold’s Inflation Utility - 10th Jun 21
The Fuel Of The Future That’s 9 Times More Efficient Than Lithium - 10th Jun 21
Challenges facing the law industry in 2021 - 10th Jun 21
SELL USDT Tether Before Ponzi Scheme Implodes Triggering 90% Bitcoin CRASH in Cryptos Lehman Bros - 9th Jun 21
Stock Market Sentiment Speaks: Prepare For Volatility - 9th Jun 21
Gold Mining Stocks: Which Door Will Investors Choose? - 9th Jun 21
Fed ‘Taper’ Talk Is Back: Will a Tantrum Follow? - 9th Jun 21
Scientists Discover New Renewable Fuel 3 Times More Powerful Than Gasoline - 9th Jun 21
How do I Choose an Online Trading Broker? - 9th Jun 21
Fed’s Tools are Broken - 8th Jun 21
Stock Market Approaching an Intermediate peak! - 8th Jun 21
Could This Household Chemical Become The Superfuel Of The Future? - 8th Jun 21
The Return of Inflation. Can Gold Withstand the Dark Side? - 7th Jun 21
Why "Trouble is Brewing" for the U.S. Housing Market - 7th Jun 21
Stock Market Volatility Crash Course (VIX vs VVIX) – Learn How to Profit From Volatility - 7th Jun 21
Computer Vision Is Like Investing in the Internet in the ‘90s - 7th Jun 21
MAPLINS - Sheffield Down Memory Lane, Before the Shop Closed its Doors for the Last Time - 7th Jun 21
Wire Brush vs Block Paving Driveway Weeds - How Much Work, Nest Way to Kill Weeds? - 7th Jun 21
When Markets Get Scared and Reverse - 7th Jun 21
Is A New Superfuel About To Take Over Energy Markets? - 7th Jun 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Banking Sector Regulation, A Breath of Fresh Volker

Politics / Market Regulation Feb 03, 2010 - 07:20 AM GMT

By: Andrew_Butter

Politics

Best Financial Markets Analysis ArticleThere are moments in history that define a change of direction, Paul Volker’s testimony on Capital Hill last night was one of them. Perhaps it’s a co-incidence, but the minute he opened his mouth the 10-Year yield dropped, gold’s new breakout attempt stalled, and the S&P 500 rose.


Outside of the generally good-natured sniping from the Senate Committee, the most coherent criticism of the Volker Rule that has been tabled so far was from The Economist’s US Business editor who said that it was “rather too narrow and that the world, the “global economy”;  has moved on”.

Fair enough; but USA, humbled as it may be, is still the centre of the global economy, and with regard to moving on, well few people would argue that of late it’s moved on to quite a few places that many would have preferred it not to move on to.

“Narrow”? OK, but give the guy a chance, they only just dusted him off and rolled him out of the closet, and in any case as Senator Dodd pointed out in his summing up, the danger is trying to do too much and in the end failing to do anything, or more important, to do anything right.

Paul Volker was relaxed, straight-forward, so knowledgeable that one could hardly resist writing down what he said, and most of all he had integrity oozing out of his skin.  He didn’t stutter like Hank Paulson, wriggle like Tim Geithner, or give “non-answers” like Bernake. What you saw was what you got; the overriding impression that he left behind was, “At last, a safe pair of hands”.

Volker was asked “what is the one big evil thing this bill will wrest out of the system”, the answer was crystal clear; and it came straight back without a moment’s hesitation:

“What I want to get is to stop taxpayer support for speculative activity”

Now that’s change, that’s BIG change.

Break it down and you can explain the whole of the credit crunch in those terms, from the tax-break that home-ownership attracted from way-back before the Clinton era (someone else still had to pay taxes), to the taxpayer’s “implicit”, and when push came to a shove, “explicit” support for the speculation by Fannie and Freddie. To the emergency opening up of the Fed’s discount window to shadow banks who had put on sheep’s clothing, allowing them to “earn” their way out of trouble by borrowing at 0% and then lending that money back to the government at 3.5% - risk free. Some have even claimed that part of that money went to fuel the rally in the stock market; (personally I find that one conspiracy theory too far, but then again, it’s the thought that counts).

One of the many commentaries on the Volker Rule is that my heroes at Goldman Sachs will be able to skip around it because less than 5% of their funds come from deposits.

That misses the point, what the rule will do is close down the discount window, or even the option of that window, to any bank or approximation of a bank that wants to use that money to speculate on their “own” account (funded directly or indirectly by the taxpayer). Now that is a silver dagger straight into the heart of “God’s Workers”.

But the Volker Rule will affect the viability of Commercial Banking!!

One of the accusations put forward by the Committee was that if “normal” commercial banks could not “play” they would lose an important source of revenue, and this would put a drag on the primary and essential function of commercial banks to fund economic growth.

Volker didn’t have any problem putting that one to bed. He started off by explaining that the he acknowledges the vital role that commercial banking plays in supporting economic activity, and that’s why the US Central bank underwrites them by providing facilities for emergencies like the discount window (as do all central banks). But he rejected the idea that providing them with funds to speculate, either directly or indirectly, would stop them making money out of their core utility, which is making sensible loans to sensible people so they can do sensible things that help build the economy.

What he didn’t say was that the system as it is structured at the moment discriminates against “normal” banks, because the key to success these days is determined to a great extent by proprietary trading, which allows the entities that get that right (thanks in part to the funding they get from taxpayers), to distort the market for straightforward commercial banking. Which is why so little of the Fed’s recent largess, (which taxpayers will eventually pay for in one way or another), has actually got out into the real economy; but then some things are better left unsaid.

What he did say (in so may words) was that banking is a risky business and it needs public support, but providing taxpayer money to support proprietary trading is not helping your constituents, it helps a small group of individuals who are not making money for you (the taxpayer), they are making money for themselves.

“I don’t want to restrict commercial banks; I want to encourage them to do what they do”.

But all the Good Banks Will Leave America!!

Another concern of the Committee was that if USA becomes “banker-unfriendly”, the banks will move away and the American financial system will become marginalized (and implicitly the sources of foreign funds that help support America’s chronic deficit will dry up).

That’ easy, and Volker pushed the right button without even blinking, the answer is simply that what banks and foreign investors want above everything else is that the US Banking system is, to use Henry Paulson’s hollow expression of July 2008, “Safe and Sound”.

So would this regulation have stopped the credit crunch?

That’s a stock question that get’s rolled out every time. When Secretary Geithner was asked that one about his “fire-fighting plan” last March, he wriggled and squirmed almost as much as when he was being grilled about tax-evasion (and I can’t wait to see him squirm and wriggle out of the 100 cents on the dollar that he paid out to Goldman Sachs and all the other “God’s Workers”), but eventually after a few Ums…and Errs, he could only say, “Err…No”.

Volker had no hesitation, when pressed about “for example AIG”, he said (a) that’s an insurance company so that’s not even on the table (b) what we want to do is stop a lot of stupid things, and what happened in AIG is a good example of one of them.

His point was that the supervisors should have been keeping a closer eye on AIG and should have ask them what on earth they were doing with those CDS in London, and yes in that regard his proposal, and the proposal as a whole would strengthen the over-site of regulators.

But the regulators have powers – so what will this achieve?

Volker disagreed, he remarked that although regulators have some “powers” what that basically amounts to is an advisory role that the financial participants can heed or not so long as they stay within the boundaries of the laws set by Congress, the implication was that wasn’t enough, and it failed.

On this subject one of the Senators made a good point that the Volker approach was more “principle-based” than rule based, and he remarked that “the system” will always find ways to get around rules, but principles are much harder to circumvent.

Ah but this is just a case of “Never let a Good Crisis Go To Waste – to promote your pet agenda”!

Along with that line, was the position made more than once that “proprietary trading did not cause the credit crunch”.

That brought out the best in Volker, he pointed out that “we” need to look ahead to the NEXT crisis, and that “if the new regulation gives free reign to speculation (with taxpayers’ money), I may not live long enough to see the crisis that causes, but my soul will come back to haunt you”!

That raised a laugh. But it was a threat, and my impression is that Paul Volker is not someone who makes threats lightly, so be warned!

I was pleased to hear that at least someone understands that the priority now is not to build a Maginot Line to protect against yesterday’s wars, or to prepare to do fire-fighting once the damage has been done, it’s about building something to protect against the next war even starting.

“Oh…But what about Innovation and American Ingenuity?”

That was of course an easy stone to throw, seeing as Volker is on record as saying that the “only really useful financial innovation that happened over the past twenty years was the invention of the ATM machine”.

The answer to that was as usual, simple, straightforward, and credible, what he said (in so many words) was “I’ve got nothing against innovation; just it’s not the place of the taxpayer to pay, when it fails”.

The Old American

The first American I ever met was a guy called Frank Perez (his dad was half-Spanish and his mum was German Scandinavian, a real mongrel like many Americans). He was a “driller of oil wells”, really, just like in the song; and I was “just a kid”.

Big heart; generous with his time and his advice, full of laughs and stories; but no nonsense about stuff that was serious.

That was old-school American; that was before they brought in people who could afford to pay for a Harvard education and measured themselves by how much money they made.

In those days it used to be about integrity, and above all, competency; could this be the signal for the change that Obama was elected on?

By Andrew Butter

Twenty years doing market analysis and valuations for investors in the Middle East, USA, and Europe; currently writing a book about BubbleOmics. Andrew Butter is managing partner of ABMC, an investment advisory firm, based in Dubai ( hbutter@eim.ae ), that he setup in 1999, and is has been involved advising on large scale real estate investments, mainly in Dubai.

© 2010 Copyright Andrew Butter- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Andrew Butter Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in