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Jeremy Grantham endorses the Volcker Rule


In a remarkable development, a Volcker plan for Glass-Steagall-lite has been proposed by the Administration.

One minute Paul Volcker, the only financial administrator not called Brooksley Born who has shown any real backbone in the last 30 years, is so out in the cold that his toes must have frozen off, and the next – hey, Presto! – his ideas are put forward lock, stock, and barrel and Geithner and Summers are left scrambling to take some credit for the plan and pretend they hadn’t been dissing Volcker up until eight seconds ago for what they thought were his antique and unnecessary ideas that were far too harsh on our poor banking system.

Wow!  Well, these new ideas are all good stuff as far as I’m concerned, and entirely justified.

Everyone in Congress, and anywhere else for that matter, knows prop desk trading (banks trading their own capital like a hedge fund) is a conflict of interest.  They may or may not think it important or that it caused this or that problem, but they know it’s a real conflict.  Congressmen, since when wasn’t conflict of interest and poor ethical standards reason enough to change the law?  But since we bring it up, of course prop trading was indeed the rot at the heart of our financial problems.

Watching traders take home their $28 million bonus sent a powerful message to lowly salesmen and packagers of asset-backed securities, for example, to get out there and really take some risk.  This rot spread to the very top, and pretty soon chairmen of boards were exhorting CEOs to leverage up and look more like some much more profi table rival that resembled a hedge fund rather thanan investment bank.

Thus encouraged – or intimidated – some CEOs just kept on dancing right off the cliff.  Let’s learn from our near disaster.  Viva Volcker!


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