That Volcker, He Rules

Paul Volcker takes to the Sunday NY Times with a guest op-ed on the economy in this morning's must-read on Too Big To Fail.

What we do need is protection against the outliers. There are a limited number of investment banks (or perhaps insurance companies or other firms) the failure of which would be so disturbing as to raise concern about a broader market disruption. In such cases, authority by a relevant supervisory agency to limit their capital and leverage would be important, as the president has proposed.

To meet the possibility that failure of such institutions may nonetheless threaten the system, the reform proposals of the Obama administration and other governments point to the need for a new “resolution authority.” Specifically, the appropriately designated agency should be authorized to intervene in the event that a systemically critical capital market institution is on the brink of failure. The agency would assume control for the sole purpose of arranging an orderly liquidation or merger. Limited funds would be made available to maintain continuity of operations while preparing for the demise of the organization.

To help facilitate that process, the concept of a “living will” has been set forth by a number of governments. Stockholders and management would not be protected. Creditors would be at risk, and would suffer to the extent that the ultimate liquidation value of the firm would fall short of its debts.

To put it simply, in no sense would these capital market institutions be deemed “too big to fail.” What they would be free to do is to innovate, to trade, to speculate, to manage private pools of capital — and as ordinary businesses in a capitalist economy, to fail. 

And this is the guy who should have been running the show at Treasury from the start.  Obama needs to make sure the major thing Dems in Congress can do to win and to do the right thing is get the Volcker Rules made into law ASAP.  Dump Larry Summers.  Dump Timmy.  You had your chance to dump Helicopter Ben but didn't, but that means all the more that Obama's policy needs to be Volcker's, and the rest of the econ team needs to be pushing the Volcker Rules as a good idea.

Make this happen, Dems.  You want to win in 2010?  You want to save the economy?  Make this happen.