VOLCKER WARNS AGAINST FUTURE BAILOUTS

The former head of the Federal Reserve, Paul Volcker - the man who tamed inflation in the 1980s, and then voted against some of the deregulation stupidity that allowed the morons on Wall Street to bring down our financial system - is sharing his wisdom with us again.

In today's NY Times Volcker warns that the Obama administration’s proposals, to overhaul the financial system's rules, would actually preserve our “too big to fail” policy. He argues that they will also lead to future banking bailouts. I couldn't agree more. Specifically,Volcker told Congress,

... that by designating some companies as critical to the broader financial system, the administration’s plans would create an expectation that those companies enjoy government backing in tough times. That implies those financial companies “will be sheltered by access to a federal safety net.”

Volcker is criticizing developments that have expanded the government safety net to include insurance companies, investment banks, and the auto industry. Let's call a spade a spade. What Volcker is really criticizing is the evolution of Corporate Welfarism.

What we need to do is pretty simple.

If a business is so big that it's "too big to fail" by definition it is a domestic and national security risk. Domestically, too-big-to-fail induced meltdowns cause unemployment and destroys lives. Internationally these meltdowns are contagious and convince leaders to blindly march their unemployed and (largely) clueless citizens past economic warfare and into all out warfare (see the 1930s).


These considerations alone mandate regulation.

Permitting "too big to fail" to continue unabated also undermines the democratic impulse in America. It grants certain financial institutions "poaching" rights on state perogatives (like taxation) and state resources (our money). No "private" institution should be allowed to hijack and siphon off state resources with impunity simply because they're so big and incompetent that we can't control them.

This can be addressed with a break up of the financial instituions, like we saw with Standard Oil and Ma Bell.



Either way we look at it, it's clear that the state needs to heavily regulate and/or break up the "too big to fail" financial institutions. Otherwise, we're simply misleading ourselves, and throwing our money and efforts into a giant Black Hole (again).



We can start, as I pointed out almost 9 months ago, by unwinding the deregulation policies that were enacted over the past thirty years. Then we compliment it with a new set of rules to account for our recent market stupidity. The break up of the larger institutions can follow.

It's really not that difficult.

- Mark