Volcker Rule: Dead on Arrival? And is Obama a Lame Duck?

Yves Smith

Feb 2, 2010 12:32PM

We’ve argued that the “Volcker Rule,” which would limit “proprietary trading” by banks, is in theory a very good idea, but the proposal put forward by Volcker/Team Obama goes wide of the mark by defining any customer trade as not being part of proprietary trading. That’s a spurious distinction; large-scale position-taking well beyond what was needed for market-making dates back to the 1980s, long before firms had separate proprietary trading desks or in-house hedge funds. As a result, they looked likely to have little impact. As we noted:

 You can drive a supertanker though the loopholes in this proposal, which are:

1. If a firm does not own a bank, it can do proprietary trading

2. Trades with customers are not proprietary trades

These are so silly that I’m astonished anyone is treating this proposal seriously.

Let’s dispatch them in order.

Medicine for Europe’s sinking south

By Nouriel Roubini and Arnab Das

Published: February 2 2010 20:33 | Last updated: February 2 2010 20:33, FT.com

A nother Great Depression may have been averted but the crisis is far from over. Credit is tight and contagion is spreading to all highly leveraged points in the global economy: mortgage-ridden households (Iceland, the US, the UK, Spain, Ireland, central and eastern Europe); banks (Iceland, the US, the EU, Russia and the former Soviet Union); quasi-sovereign debt (Ukraine’s Naftogaz, Dubai World); and now Greece and other weak links in the eurozone.

Greece has long been an accident waiting to happen due to heavy public debt and lack of competitiveness. But its problems are not unique. On their resolution rides the fate of its neighbours, the eurozone and perhaps the European Union itself.

China’s Current Account Narrowed in 2009

As China’s trade surplus narrowed in 2009, so did the current account surplus, of which trade is the largest component. It was the first year in almost a decade in which the current account surplus narrowed as growth of imports, particularly commodities, outpaced that of exports. China’s current account surplus fell to 6% of GDP from the 10% recorded in 2008. However, many economists and institutions, including the IMF, believe that China’s surplus will widen again in 2010 and beyond, unless China takes further steps to encourage domestic consumption.

G7 Ministers Focus on Financial Reform, Not Currencies

In recent meetings of the G7 leaders, there have been few direct mentions of exchange rates, despite concern about their volatility and consensus that the renminbi (RMB) has to appreciate against the dollar to promote global demand. This trend continued at the February 2010 meeting in Iqaluit in Canada’s Nunavut territory. The G7 finance ministers pledged to continue stimulus as needed, but their primary focus was getting closer to a consensus on financial reforms, including a proposed bank levy that will be proposed to the G20 and new capital requirements to be imposed on a global level. The ministers also supported debt relief for Haiti.

A Bubble in Search of a Pin

John Mauldin, 6 Feb 2010.

Should Greenspan and Bernanke have seen the bubble in housing and other assets and acted, or should we accept their defense that you can’t know whether there is a bubble until after the fact? We will look at research that suggests they should have known, and, at the least, policy makers should no longer be allowed to say, „How could I have known?“

Of course, the employment numbers came out this morning, and the results are mixed; but that is better than they have been for the past two years. We dig into the numbers to see what they are really saying. And finally, we examine why the markets are so volatile. Is it just Greece, or is there more? There’s a lot of very interesting, and important, material to cover.

Romania Monetary Policy: Central Bank Cuts Rate to 7.0%

Romania’s central bank (NBR) cut the benchmark interest rate by half a percentage point to 7% in February 2010. The second cut this year came after Romania’s credit rating outlook was raised and the IMF recommended the resumption of loan payments. The Romanian rate remains the highest in the EU. In the NBR’s press release, policymakers referred to “a persistent deficit of aggregate demand, a consolidation of the current account deficit at sustainable levels as well as the continued slowdown in real terms of the annual dynamics of lending to the private sector.”  They also underlined the currency strengthening amid the reactivation of the IMF-led loan and continued disinflation.

Russian Economy out of Recession, but How Fast Will It Grow?

Russia experienced a sharp economic decline in 2009, with output falling 7.9%, led by double-digit declines in industrial production, fixed investment and construction as well as more moderate contractions in retail sales.  Although Russia has exited recession, after beginning to grow on a q/q basis in Q3 2009 and accelerating in Q4 2009, recovery has been subdued by financial vulnerabilities and weak consumption. The Russian economy contracted around 7.9% in 2009, the sharpest decline of the major economies. In December 2009, the government forecast growth of at least 3.1% in 2010 but suggested it could be as high as 6% in a January statement. The increase in the price and output of oil narrowed Russia’s 2009 decline and reduced its withdrawal from savings, and will reduce 2010 debt issuance

Neueste Meeting Minutes des Arbeitskreises

nach dem Meeting von gestern. Neu: Seiten 73-85, 108.

Föhrenberg-Kreis Financial Economy III 10-02-02

Bankers try to fight off wave of controls

By Patrick Jenkins and Gillian Tett, FT

Published: January 31 2010 17:07 |

Protesters were handing out leaflets in the streets of Davos at the weekend. But their anger was not directed against world poverty, nuclear power or war; instead they were demanding that banks should put their derivatives business on to exchanges to make the financial system more transparent.

It is a potent reminder of how issues about financial stability dominated the agenda at the World Economic Forum last week. For most of the past decade, banks have used the WEF in Davos as a lavish opportunity to entertain clients. Last week they were fighting to fend off a wave of controls on sectors ranging from bonuses to proprietary trading and derivatives.

The ‘Volcker Rule’ as a modern-day Glass-Steagall

By John Authers, Investment editor , Financial Times 

Published: January 21 2010 19:44  

For Glass-Steagall in the 1930s, read the Volcker Rule for a new decade. Instead of the crude separation of commercial and investment banking, we will now see an equally crude split of the banking business from proprietary trading, hedge funds and private equity. 

Some salient points on Glass-Steagall are often missed. First, for decades, it worked. The US financial reforms of the 1930s helped to deliver decades of stable economic growth and reasonably stable growth in equity markets.