The Volcker Rules

When I heard Obama was going to take another swipe at banks today, I dismissed it as another meaningless gesture like last week's TARP tax initiative.  Wall Street's been on a streak in the new year, betting big that Scott Brown's win means Obama won't be able to even do the meaningless gestures anymore.

I've also been saying that Paul Volcker is the best weapon Obama has in his arsenal when it comes to doing real reform against the banksters.  Obama has been all but ignoring him totally in favor of Larry Summers.  Earlier this year I argued Volcker should say "listen to me or I'm out" and like Colin Powell did resign instead of being used as a tool by an administration that didn't believe a word he was saying.

Apparently Obama really did gain one of the lessons of Scott Brown's win this week:  Obama has been losing the populist fight on the banksters, so now finally he turns to Paul Volcker.

But Paul Volcker is back. Big time. Reportedly on the margins of the Obama administration even in his current role as an adviser, "the tall guy behind me," in the words Thursday of President Barack Obama, is back on stage figuratively and literally.

As the president announced two major initiatives that would radically change the world of America's big banks, he was flanked by Treasury Secretary Timothy Geithner and adviser Larry Summers. He also had with him two key Congressional leaders, Rep. Barney Frank (D., Mass.) and Sen. Christopher Dodd (D., Conn.).

But importantly, the president had Mr. Volcker, and he had another regulatory veteran who's been a straight shooter unbound by ideological restraints or misplaced party fealty.

That's William Donaldson, former head of the Securities and Exchange Commission. President Obama thanked both Mr. Volcker and Mr. Donaldson for their counsel, which, given the nature of the Obama proposals, was "old school" in more senses than simply a reference to the vast combined financial experience of both men. Agree with it or not, the "Volcker Rule," enunciated by the president Thursday—which would keep a bank from having anything to do with investment vehicles such as hedge or private equity funds— certainly signals Mr. Volcker's return.

It is a fascinating resurrection. Mr. Volcker himself hasn't changed his thinking. What has changed is the environment. The heavy, popular furor as big bank profits and big bonuses are rolled out likely played a role in the new Obama plan. That plan includes flat-out limits on bank size and restrictions on industry consolidation.

I'm happy to say I was wrong.  The Volcker rules, such as they are, are a major step towards what I've been saying Obama needed to do since day one:  restore the separation between bank and investment house that Glass-Steagall provided.

If you have any doubts as to how concerned Wall Street is right now, the Dow lost over 200 points in its worst day in almost eight months, and its worst two day drop since June, giving back all the Scott Brown gains and more.

On Tuesday, Wall Street was betting on Brown ending Obama's crusade against the banksters for good.  They bet and lost yesterday and today.  There's a new Sheriff in town, and his name is Paul Volcker.

The problem is, as James Kwak over at Baseline Scnario says, there's even less chance now of this financial reform passing the Republican party's 41 blockade in the Senate.  But this means that the Republicans are the party of Wall Street, not the Democrats.  And that's what Obama should have done in February.

It's a start.  Even Krugman admits it's a positive sign.  More Volcker, please.