US President Barack Obama announced the biggest changes in banking in 10 (details here at Bloomberg) years by essentialy re-repealing the Glass-Steagall Act that had separated investment banks and such taking deposits between 1933 and 1999, and the announcement to curb banks' proprietary trading with depositor's money.
This move can be clearly seen as a victory of former Federal Reserve Chairman Paul Volcker who already warned as early as 2006 that deficits were unsustainable and that current chairman Bernanke would have a tough time.
VIDEO: Note that Paul Volcker stands to the right of the president, with Geithner a distant 3rd. Is Geithner moving away because Obama suddenly abandoned Wall Street for Main Street? Mr. Volcker, who currently heads the President's external panel of advisers on economic recovery, has consistently advocated a more aggressive approach to fixing the financial system that has not, until now, found favour within the administration.Volcker ist the last Fed chairman that successfully drove the USA out of a recession coupled with high inflation, high unemployment and record high interest rates north of 21% in the early 1980s. He was succeeded by Alan Greenspan, who, maybe shocked by the crash of '87 when he was barely 2 months in office, went on an 18-year spree of easy money, leading to the current catastrophic financial situation.
The British Telegraph has more on Volcker's gaining influence here. The Washington Post was quick to note last Friday, "Obama's 'Volcker Rule' shifts power away from Geithner."
The story is an accolade to Volcker that makes one ask whether Geithner will ever get a bell-boy job on Wall Street in the future. Reuters defended him here.
But The Washington Post blasts the Treasury Secretary:
For much of last year, Paul Volcker wandered the country arguing for tougher restraints on big banks while the Obama administration pursued a more moderate regulatory agenda driven by Treasury Secretary Timothy F. Geithner.Obama's first move against Wall Street is certainly a good popularity offensive, but it has to be followed up with a true move to help Main Street.
Thursday morning at the White House, it seemed as if the two men had swapped places. A beaming Volcker stood at Obama's right as the president endorsed his proposal and branded it the "Volcker Rule." Geithner stood farther away, compelled to accommodate a stance he once considered less effective than his own.
The moment was the product of Volcker's persistence and a desire by the White House to impose sharper checks on the financial industry than Geithner had been advocating, according to some government sources and political analysts. It was Obama's most visible break yet from the reform philosophy that Geithner and his allies had been promoting earlier.
Senior administration officials say there is now broad consensus within the White House and the Treasury for the plan advanced by Volcker, who leads an outside economic advisory group for the president. At its heart, Volcker's plan restricts banks from making speculative investments that do not benefit their customers. He has argued that such speculative activity played a key role in the financial crisis. The administration also wants to limit the ability of the largest banks to use borrowed money to fund expansion plans.
The proposals, which require congressional approval, are the most explicit restrictions the administration has tried to impose on the banking industry. It will help to have Volcker, a legendary former Federal Reserve chairman who garners respect on both sides of the aisle, on Obama's side as the White House makes a final push for a financial reform bill on Capitol Hill, a senior official noted.
Advocates of Volcker's ideas were delighted. "This is a complete change of policy that was announced today. It's a fundamental shift," said Simon Johnson, a professor at MIT's Sloan School of Management. "This is coming from the political side. There are classic signs of major policy changes under pressure . . . but in a new and much more sensible direction."
Industry officials, however, said they were startled and disheartened that Geithner was overruled, in part because they supported the more moderate approach Geithner proposed last year.
Can Prop Trading Be Outlawed In a Globalised Financial World?
Obama's proposal to ban proprietary trading at banks bailed out with taxpayer's money is certainly placative. But it will depend on his ideas for Main Street to win over the American public - he gives a speech later today.
Back to prop trading: With the top players residing in every major financial centre it will take some time to sort out supranational problems in enforcing this rule. As Long as the London offices can go unhindered as before, this is just more lipstick for the pig.
Market implications can be expected to be wide ranging, judging from the almost 600-point decline in the Dow Jones Industrials Average since rumors about Obama's radical plans began to make the rounds. Practical details - market making!!! - have yet to be discussed to arrive at a sensible reform that does not choke markets at one. Unfortunately this will happen anyway as declining liquidity has never benefitted markets.
Help for stock markets may come from a so far overlooked side: Hyperinflation, which will begin to run later this year, driven by food prices.
Taking the example of Zimbabwe, the latest nation history that saw unprecedent hyperinflation, I still remember that one could double his money in real terms in the stock market. Give me any Dow level - 20,000; 50,000 or 1 million - I am perfectly content - as long as you give me a time-correlated forecast for a BigMac at the same time.
Stocks may actually pose a good inflation hedge, as long as you avoid the FIRE (finance, insurance, real estate) sector. Even if the sky falls down, companies close to the consumer (food, ammunition, basic amenities, household staples) may be a good bet in the coming depression accompanied by hyperinflation. And as long as trigger-happy Barack Obama continues his perspectiveless wars in Asia, the arms sector will show a good performance too. Nobody is a worse bargainer than the Pentagon.
But this leads to another upcoming post, work-titled: A global economy without arms and wars. So far I have not found material on this utopian thought.
I sign off with the heads-up that Ben Bernanke still has not been reconfirmed, 6 days before the end of his first term. If he does not get reconfirmed Vice Chairman Donald Kohn will take the helm until a new Chairman is appointed.
The Financial Times details the key players in Bernanke's reconfirmation and names some top contenders if Bernanke does not get reconfirmed:
Congressional critics of Mr Bernanke, some fearful for their own re-election prospects and others critical of the Fed’s management of the financial crisis, moved against him, adding to a list of proclaimed no votes.
Democratic senators Barbara Boxer from California and Russ Feingold from Wisconsin, said that they would oppose Mr Bernanke in a vote that has been promised before the end of his term on January 31.
Mr Bernanke needs 60 votes to secure confirmation as a result of procedural blocking tactics.
Donald Kohn, the Fed vice-chairman, would serve as interim head of the bank if Mr Bernanke’s confirmation were rejected or delayed.
Other names circulated as possible permanent alternatives have included Mr Kohn, Lawrence Summers, the president’s adviser, and Alan Blinder, the Princeton University economist.
White House and Treasury aides said that President Barack Obama and Tim Geithner, Treasury secretary, were confident that Mr Bernanke would be confirmed by the Senate five months after the president announced his renomination.
Earlier, the vote of Harry Reid, Democratic leader in the Senate, had appeared to be in doubt, but he issued a statement that said: “While I will vote for his confirmation, my support is not unconditional.”
Economists warned that a rejection of Mr Bernanke could be seen as a threat to the central bank’s independence. US Treasury yields were little changed but stocks fell more than 2 per cent (on last Friday.)
Oh no, don't ask me how this will make the VIX and FX markets go crazy.