Bloomberg reported today that former Federal Reserve Chairman Paul Volcker, who currently heads President Obama’s Economic Recovery Advisory Board, “visited nine cities in five countries in the past eight weeks to warn that bankers and regulators ‘have not come anywhere close to responding with necessary vigor’ to the worst economic crisis in 70 years.”
In particular, Volcker has slammed the notion that financial regulation will stifle innovation by saying that the greatest banking innovation in the last 20 years was the ATM. “I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence,” Volcker said at a banker’s conference in England.
However, “there’s little evidence that policy makers are heeding Volcker”:
Two years after the start of the deepest recession since the 1930s, no U.S. or European authority has put in force a single measure that would transform the financial system, based on data compiled by Bloomberg. No rule- or law-making body is actively considering the automatic dismantling of banks that Volcker told Congress are sheltered by access to an implicit safety net
While Bloomberg is technically correct that “automatic dismantling” is not being considered, the report leaves out that Great Britain is taking apart the mega-banks that are still under government control, while the financial regulatory reform package passed by the U.S. House of Representatives last week included an amendment from Rep. Paul Kanjorski (D-PA) that would allow regulators to dismantle systemically risky firms.
Plus, House Majority Leader Steny Hoyer (D-MD) said today that House Democrats are “considering reinstituting the Depression-era Glass-Steagall Act,” which placed a regulatory wall between depository institutions and investment banks, preventing financial conglomerations like Citigroup from coming into being “As someone who voted to repeal Glass-Steagall, maybe that was a mistake,” Hoyer said.
So while it’s true that Volcker’s voice hasn’t been amplified enough — and the administration is counting way too much on public admonishments to influence bank behavior — there are at least some steps being taken to more actively rein in the biggest banks on both sides of the Atlantic.
Volcker’s argument about the role of innovation, though, is spot-on, and hasn’t been adequately discussed. As Dean Baker pointed out, “financial industry profits now account for more than 31.5% of all corporate profits,” which is “a higher share than at any point during the housing bubble years.” One financial engineer actually told Volcker that financial innovation does nothing to help the economy, but “it’s a lot of intellectual fun.”
Do we need a financial system that swallows up almost one-third of corporate profits by passing paper back and forth? I don’t think we do. And hopefully lawmakers will realize that Volcker is beating this drum and listen up.