The Daily Bell
Issue 425 • Tuesday, September 29, 2009
Mark Wilson/Getty Images
Volcker said Obama's plan implies the government will be prepared to bail out the firms in a crisis, encouraging even more risky behavior in a phenomenon known as "moral hazard." Former Federal Reserve Chairman Paul Volcker (pictured left) isn't too happy with the White House's proposal for financial regulation reform because it retains the "too big to fail" doctrine. The Obama administration plans to subject "systemically important" financial firms to more stringent regulation by the Fed. In testimony before Congress, Volcker pointed out that this idea implies the government will be prepared to bail out the firms in a crisis, encouraging even more risky behavior in a phenomenon known as "moral hazard." "Whether they say it or not, that carries the connotation in the market that they're too big to fail," said Volcker, chairman of the White House Economic Recovery Advisory Board, Bloomberg reports. He also called for stricter controls on commercial banks than the Obama administration has proposed, saying they should be barred from sponsoring hedge funds and private equity funds and forbidden to engage in proprietary trading. - NewsMax
Dominant Social Theme: Volcker speaks for responsibility.
Free-Market Analysis: One of the things that central banking does among other things is basically turn marketplace finance into radioactive waste. Mention hedge funds, private equity and derivatives and responsible people in Washington DC go apoplectic. Of course, in each instance, the marketplace is a fairly unregulated one. And there is nothing wrong with this absent central banking. The ability to print unlimited amounts of money is the marketplace's problem - not free-market profit-making strategies.
Why should it be that the market throws up so many dangerous financial phenomena? The answer of course is because central banking itself encourages the bubbles and euphoria that affect both public and private markets. In fact, there is nothing "public" about public markets except a regulatory enterprise. Public firms are firmly under the thumb of a variety of regulatory authorities while private firms are somewhat exempt. Public firms have a variety of reporting duties while private firms of all sorts have fewer.
The idea however that public firms are any safer than private ones is a stretch, especially given the most recent meltdown in which central banks and treasury authorities had to throw tens of trillions into the market to prevent the collapse of even the bluest of blue chip companies.
Volcker seems to speak for the market in his comments. He is upset that the government is providing implicit assurances to the market for certain firms. This should not be, he believes. But at the same time, Volcker comes down on the side of stringent regulation for private enterprises that are unregulated. Volcker never explains - though he must know - that it is the very institution he once chaired (the Federal Reserve) that helps create chaos in the marketplace worldwide and poisons the well of entrepreneurship.
This is the same sort of schizophrenic logic that dogs the larger Conservative and Republican movements when it comes to sticking up for free markets. On the one hand, free-markets are lauded. On the other, a vast, aggressive and highly-regulated multi-trillion dollar military-industrial complex is not only tolerated but supported by the same individuals who support the nation's entrepreneurship.
Between the US military and Federal Reserve, there is not, unfortunately, very much free market left. Those on the "right" are reduced to battling over changes that are really on the margin - tax rates, regulatory structure, etc. The real power in America is held by the banking industry and its related military and pharmaceutical holdings among others.
Conclusion: There is nothing the financial marketplace would cast up that would be considered dangerous were it not for constant money stimulation. It is central banking policies that make derivatives, hedge funds and private equity "dangerous" - in the sense that these instrumentalities are subject to failure. Were there an honest money standard such as a market-based gold and silver one, all the strategies and asset-gathering in the world would not likely prove much more dangerous than the current crop of large, hemmed and heavily regulated ones. The choice is between further pruning back financial innovation and capital creation - especially for entrepreneurs - and pruning central banking. We know where Volcker stands.