Volker Rule Offers More, Not Necessarily Better, Regulation of Banks

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If these folks want a fight, it’s a fight I’m ready to have,” said President Obama as he emphasized his campaign against Wall Street. Following up on the after-TARP tax, Obama is introducing the Volker Rule to impose tougher regulations on the financial sector.

The Volcker rule will cap the size and scope of banks, limiting their trading abilities and risk taking. Banks insured by the FDIC will have to give up proprietary trading and their hedge funds. But WSJ columnist Jason Zweig explains that the Volcker Rule could distort behavior, as smaller banks become more aggressive and larger banks get “lazier and less disciplined.”

Regarding Obama’s claim that “never again will the American taxpayer be held hostage by a bank that is ‘too big to fail’,” Nicole Gelinas points out that the big financial institutions bailed out in 2008 were not insured by FDIC. Despite the new rule, recent events suggest that the government will continue bailing out troubled institutions in the future.

New regulations should seek to improve the incentives and information available in the financial markets. Financial reform is necessary, but the recovery will not be advanced by punishing institutions that play a key role in generating economic growth. The DJIA dropped 213.27 points after Obama’s proposal, an indication that investors do not want to see Wall Street treated like an enemy by the government.

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