Former Fed Chair Paul Volcker has a specific critique of the administration's bank plan: Basically, he wants to bring back the separation of commercial banks and investment banks, a la Glass-Steagall. While that's not necessarily a bad idea in terms of creating a healthy banking system, it won't fix the problems that led to the financial crisis. Instead, I take an approach on this similar to Yves Smith at Naked Capitalism, who breaks down why it's so hard to simply chop up the banking system: She explains that the problems are in the broader capital markets, and include issues like leverage and derivatives. Read the whole thing ...... except the last two paragraphs, where Smith becomes too pessimistic, in my view, and basically throws up her hands. I'm more confident about the reforms coming through Congress -- particularly the resolution authority for large, non-bank financial institutions (in theory, it will put an end to bailout culture by allowing the government to liquidate firms in such a way that they don't damage the broader economy). Further, the incentives for banks to become smaller -- like limits on federal preemption and the all-important capital and leverage limits -- will begin to rein in the banks. All of this depends on who the regulators are; one thing that structural reform can never solve is ensuring that the people in those institutions have the right knowledge and attitude to use their new tools. In the next print issue of TAP, I have a piece making just this case.-- Tim Fernholz
