The Volcker Rule Advances

Progress Is Seen in Advancing a Final Volcker Rule ... Daniel Tarullo, a Federal Reserve Board governor, held a meeting on Wednesday with the heads of six major banks. A major new rule that has drawn the ire of Wall Street is on track for completion sooner than some bankers had expected, dashing the hopes of financial industry lobbyists, who have pressed for a delay. Regulators are making significant progress on a final draft of the regulation, the Volcker Rule, and some officials expected to complete it by September and possibly as early as this summer, people with direct knowledge of the matter said. The people, who spoke on the condition of anonymity, cautioned that regulators have not set a firm date for completing the rule. The Volcker Rule aims to rein in risky trading on Wall Street. Named for Paul A. Volcker, the former chairman of the Federal Reserve, it would ban banks from placing bets with their own money, a practice known as proprietary trading. – Bloomberg

Dominant Social Theme: And so Barney Frank is to free us again.

Free-Market Analysis: Here it comes. Another elite dominant social theme designed to support the idea that wise regulation can make a big and positive difference in the world.

This is surely a promotion – as regulation can make things worse but rarely better. Regulation is a price fix, mandating a transfer of wealth from those who create it to those who haven't and may not know what to do with it.

One of the most attractive current regulatory memes has to do with the idea that big Wall Street banks have to be restrained from trading against their customers.

At its simplest, the argument is that big financial entities will simultaneously bet with their book and against it, eventually plunging the Street into chaos and despair. Here's some more from the article:

When regulators first proposed a version of the rule last year, they received a torrent of criticism from the financial industry, which complained about the length and complexity of the proposal. It was the most hostile response to any provision of the Dodd-Frank financial overhaul law, which created the Volcker Rule with the notion that banks should not make risky wagers while enjoying government deposit insurance and other types of backing.

Some opponents of the Volcker Rule urged regulators to tear up the draft and start from scratch. That tactic, which even gained support among some high-level regulators, was seen by some as a ploy to delay the rule-writing process until after the 2012 election, which might end the Democratic control of the Senate and the White House.

"Reproposal is necessary for several reasons," the Securities Industry and Financial Markets Association, an influential Wall Street lobbying group, said last month in a letter to regulators. "First, the changes to the proposal needed to correctly implement the Volcker Rule mandate and to avoid serious harm to our financial markets are so extensive that reproposal will be required as a matter of administrative law."

But regulators driving the rule-writing process have not discussed scrapping the draft and currently have no plans to repropose a new version, the people briefed on the matter said. In fact, regulators are moving forward on the wording of critical provisions, like exemptions that allow banks to hold a certain amount of securities for customers.

The assumption here is market failure. But markets don't fail. Wall Street is basically a mercantilist entity, a group of firms that have been propped up by all the puffery and power of the US itself.

Because so much has been given to Wall Street, something is to be taken away. But markets don't work like that. It is not really possible to create privileges and then moderate them.

What works best in markets is the Invisible Hand of competition. But one cannot substitute government bureaucracy for the Invisible Hand with any certainty that the outcome will be as preferred.

In fact, it cannot be seen as something other than a kind of regulatory promotion of itself. Markets in the current era don't rise and fall because of Wall Street manipulation but because of monopoly-fiat central banking.

Too much money printing creates first booms and then busts. But the power elite that seeks to maintain its money franchise doesn't want central banking to appear in the crosshairs. Thus the old scapegoat is hauled out ... Wall Street.

The problem, of course, is money power, the ability to print money from nothing within a monopoly context. Tinkering with what Wall Street can and cannot do is merely a cover-up for the real problem.

Conclusion: Wall Street should be exposed to more competition, not to additional regulations.