Today, former Federal Reserve Chairman and Obama administration adviser Paul Volcker appeared before the Senate banking committee to discuss the “Volcker rule,” which is the Obama administration’s proposal to bar deposit taking financial institutions from engaging in proprietary trading (trading for their own benefit, not for any particular customer).

As the Wall Street Journal reported, the bank’s themselves are gearing up to fight the rule. And they seem to have a few allies in the Senate, where one line of criticism today was that the Volcker rule would not have prevented the 2008 financial crisis, since the popular culprits — AIG, Lehman Brothers, Bear Stearns — were not commercial banks and thus would have been unaffected.

Volcker addressed this criticism by explaining that, first, the administration is not claiming that this rule, in isolation, will shore up the financial system. It’s merely one part of a wider regulatory reform effort, including a resolution authority for dismantling failed, systemically risky firms without using taxpayer money.

But second, Volcker noted that we currently have a banking system where all of the large institutions are essentially subsidized by the taxpayer and can gamble with taxpayer backing, which is an untenable situation. So the Volcker rule is as much about correcting this as reacting to the last crisis. He even told Sen. Mike Johanns (R-NE) that should another financial crisis occur because new rules were not put in place “my soul is going to come back and haunt you”:

What I want to get out of the system is taxpayer support for speculative activities. And I want to look ahead. If you don’t bar that, it’s going to become bigger and bigger and it adds to what is already a risky business…The problem today is look ahead and try to anticipate the problems that may arise that will give rise to the next crisis. And I tell you, sure as I am sitting here, that if banking institutions are protected by the taxpayer and they are given free rein to speculate, I may not live long enough to see the crisis, but my soul is going to come back and haunt you.

Watch it:

While the Volcker rule would not have stopped Lehman Brothers from blowing itself up, as the New York Times pointed out, at conglomerates like Citigroup and Bank of America “proprietary trading, mainly in risky mortgage-backed securities, precipitated the credit crisis in 2008 and the federal bailout.” All of the banks were engaged in slicing and dicing mortgages, not for the benefit of their customers, but to bolster their own bottom lines. This is the sort of activity that the Volcker rule is aimed at.

And Volcker’s point about trying to prevent the next mess is important. During the financial crisis, all of the big investment banks (including Goldman Sachs and Morgan Stanley) became bank holding companies, which gives them access to federal guarantees and cheap loans. They still have those federal guarantees today and reportedly have no intention of giving them up. So they’re able to engage in all their usual high-risk trading, with money backed up by the taxpayer and none of the drawbacks of commercial lending. So it’s no coincidence that the big trading banks once again have booming profits while the institutions with more commercial lending are still stuck in the doldrums.

Sen. Chris Dodd (D-CT), firing back at reports that he would water down the rule, said today that “I strongly support this proposal. I think it has great merit.” Indeed, while no one step would have prevented the entirety of the financial crisis, that’s no reason for failing to put in safeguards that would have helped and that will make for a more secure system going forward.

Yesterday, the fiscal year 2011 budget confirmed, once again, that the Obama administration intends to allow the Bush tax cuts for the wealthiest Americans to expire on schedule at the end of the year. Of course, this has set off the predictable round of moaning from the likes of the Wall Street Journal, Fox News, and conservatives in Congress.

It’d be one thing if the parties advocating for permanent tax cuts recognized that allowing the expiration to occur would help address a portion of the country’s trouble with long-term deficits. But instead, we’re getting the likes of Sen. Chuck Grassley (R-IA), who during a Senate Finance Committee hearing on the budget today, spent half his time slamming the deficit and the other half warning against any tax increase at all, including allowing the Bush rates on the wealthy to expire:

Over the past year, with the levers of power all concentrated in the hands of those on the other side, we’ve seen the fiscal path worsen. Deficits, as you see, are up, and debt is up…Look at the budget and you’ll see a big fiscal hole…My advice, and this is to the President on down: listen to what small business is saying. Back off the marginal rate tax hikes, don’t bury recovering small businesses with new taxes and penalties. Be cognizant of the tax burden that you are raising on capital.

Watch a compilation:

Now, Grassley did tell Fox News’ Greta Van Susteren that even tax increases five years from now would harm economic recovery (at which point, if the economy is still so weak that it can’t handle a tax increase on the very wealthiest, we’re in much deeper trouble), so that’s the mindset we’re dealing with. But the Center for Budget and Policy Priorities detailed the extent to which allowing the cuts to expire can help with deficit reduction:

Allowing tax cuts to expire for married filers with incomes above $250,000 and single filers with incomes above $200,000 — the top 2 percent of U.S. households — will avert $826 billion in added deficits and debt over the next ten years. The savings from allowing the top two marginal tax rates to expire for those high-income households constitute $443 billion of that $826 billion. There is broad consensus among economists and fiscal policy analysts that the deficit and debt levels the government will experience if current tax and spending policies are continued will ultimately be harmful to the economy.

CBPP also pointed out that continuing these tax cuts are the absolute worst way to boost the economy or create jobs, and once again debunked the notion — put forth by Grassley — that allowing the tax cuts to expire will hit many small businesses with a tax increase.

In an op-ed yesterday, Grassley asked whether or not “lawmakers have the political will to take on the trillion-dollar budget deficit.” It’s fairly clear that he doesn’t, but that doesn’t stop him from complaining about them anyway.