Here's an interesting new profile of Paul Volcker and his efforts to strengthen the financial-reform bill that's worth reading if you want to understand more of the behind-the-scenes work on the bill. One worthwhile section concerns a distinction that has been left out during the debate over Volcker's key contribution, which is that his eponymous rule isn't designed to end bailouts, just to target them better:Volcker believes that commercial banks, such as Citigroup and Wells Fargo, are worthy of receiving government assistance -- and even, in extremis, taxpayer bailouts -- because firms and consumers depend upon them for credit. In return for these enterprises being sheltered, they should refrain from risky activities such as proprietary trading and sponsoring hedge funds. “If you are going to be a commercial bank, with all the protections that implies, you shouldn’t be doing this stuff,” Volcker said to me. “If you are doing this stuff, you shouldn’t be a commercial bank.”
The idea is that government support, from deposit insurance to rescue, should be limited to institutions that serve the move savings into investment and lending, not speculation. That's a bit different from the idea that all bailouts are bad news, which may be a dividing line between left- and right-wing populism.
The Dodd-Frank bill does have other restrictions on bailouts, particularly limits on the power of the Fed and other regulators to lend freely and without congressional buy-in; indeed, some critics are concerned that the Fed's limited rescue power could have adverse consequences -- not enough bailouts!
A lot of people don't understand the restrictions on bailouts in the bill -- one of them is Newsweek's Jonathan Alter, who wrote that under the bill, "the Fed will use guarantees and other instruments to create the funds out of thin air, as it did last year," "free of meddling from Congress." Alter is confused: The resolution authority he was writing about doesn't allow regulators to support ailing firms, just to destroy them. On the other hand, if the Fed wants to use guarantees to prop up firms during a liquidity crisis, that requires congressional approval.
-- Tim Fernholz
