Robbing Paul Volker To Pay Peter

Presidential economic adviser Paul Volker is the guy Obama should be listening to when it comes to dealing with Too Big To Fail, but alas, the President seems to think Helicopter Ben and Timmy can still handle the problem as the NY Times reports. Volker's not giving up however.

He wants the nation’s banks to be prohibited from owning and trading risky securities, the very practice that got the biggest ones into deep trouble in 2008. And the administration is saying no, it will not separate commercial banking from investment operations.

“I am not pounding the desk all the time, but I am making my point,” Mr. Volcker said in one of his infrequent on-the-record interviews. “I have talked to some senators who asked me to talk to them, and if people want to talk to me, I talk to them. But I am not going around knocking on doors.”

Still, he does head the president’s Economic Recovery Advisory Board, which makes him the administration’s most prominent outside economic adviser. As Fed chairman from 1979 to 1987, he helped the country weather more than one crisis. And in the campaign last year, he appeared occasionally with Mr. Obama, including a town hall meeting in Florida last fall. His towering presence (he is 6-foot-8) offered reassurance that the candidate’s economic policies, in the midst of a crisis, were trustworthy.

More subtly, Mr. Obama has in Mr. Volcker an adviser perceived as standing apart from Wall Street, and critical of its ways, some administration officials say, while Timothy F. Geithner, the Treasury secretary, and Lawrence H. Summers, chief of the National Economic Council, are seen, rightly or wrongly, as more sympathetic to the concerns of investment bankers.

For all these reasons, Mr. Volcker’s approach to financial regulation cannot be just brushed off — and Mr. Goolsbee, speaking for the administration, is careful not to do so. “We have discussed these issues with Paul Volcker extensively,” he said.

Mr. Volcker’s proposal would roll back the nation’s commercial banks to an earlier era, when they were restricted to commercial banking and prohibited from engaging in risky Wall Street activities.

The Obama team, in contrast, would let the giants survive, but would regulate them extensively, so they could not get themselves and the nation into trouble again. While the administration’s proposal languishes, giants like Goldman Sachs have re-engaged in old trading practices, once again earning big profits and planning big bonuses.

More regulation by itself is not the answer. The correct regulation is, and that regulation needed is what Volker keeps suggesting: rolling back Gramm-Leach-Bliley and separating banks from investment firms. I've been saying this for many months now.

Until Obama bites the bullet on this, banks will continue to be a fundamental threat to our nation's economy, period.

Barry Ritholz also believes that Volker needs to be listened to at The Big Picture.

The sooner team O starts listening to Tall Paul, the better off they — and the country — will be . . .

At Baseline Scenario, Simon Johnson is hopeful that Volker's voice, along with Bank of England's Mervyn King represents the first crack in the dam.

Remember and repeat this Mervyn King line: ”Anyone who proposed giving government guarantees to retail depositors and other creditors, and then suggested that such funding could be used to finance highly risky and speculative activities, would be thought rather unworldly. But that is where we now are.”

But Yves Smith at naked capitalism is far more pessimistic.

Put it simply, I have yet to see anything even remotely approaching a realistic discussion of how to deal with too big too fail firms, and we have been at this for months. My knowledge of the industry is not fully current, but even so, the difficulties are far greater than I have seen acknowledged anywhere. That pretty much guarantees none of the proposals are serious, and nothing will be done on this front.

That further implies the system will have to break down catastrophically before anything effective can be done. I really hope I am wrong on this one.

All three have good point that are worth digesting this morning. For the record I think all three are right: Volker's plan is certainly better, but it will take another meltdown to convince the world that something needs to be done.

That particular meltdown will be on Obama's head should it happen.