To rein in Wall Street, former Federal Reserve Chairman Paul Volcker wants to see the return of discarded reforms first implemented during the Great Depression, he told a congressional committee Thursday.
Volcker, who famously conquered the sky-high inflation of the late '70s and '80s when he led the Fed, thinks big banks shouldn't be able to run lucrative-but-risky trading desks or underwrite stock or bond issues. Barring banks from those businesses would help reduce the danger of future crises and lessen the need for big bailouts, he said.
"I would exclude from commercial banking institutions, which are potential beneficiaries of official (i.e., taxpayer) financial support, certain risky activities entirely suitable for our capital markets," Volcker, now an adviser to President Obama, said in prepared comments to the House Financial Services Committee.
Of course, such a policy would be bad news for the likes of banks like JPMorgan Chase (JPM), Bank of America (BAC) and Citigroup (C). All of them make a lot of money from combining commercial banks, which take deposits and make loans, and investment banks, which buy and sell securities and offer merger advice, under one roof.
But a strict separation between those two kinds of businesses was the law of the land from 1933, when President Franklin Roosevelt signed the Glass-Steagall Act into law, until it was overturned in 1999.
Volcker, a widely respected figure in Washington and on Wall Street, sees a return to these Depression-era strictures as an important step toward downsizing financial firms that are too big and interconnected to fail without endangering the world economy.
"Commercial banks, taken collectively, are certainly systemically important," Volcker said. "Their basic role is to provide vital basic services to customers -- payment services, a safe depository for liquid funds, credit for individuals and businesses and financial advice."
As Fed chairman, Volcker vanquished a crushing bout of inflation nearly 30 years ago by jacking up interest rates to as high as 20 percent. Because it was blamed for plunging the country into a deep recession, the strategy was politically unpopular at the time. But the current crisis has highlighted Volcker's views on the need for strong financial regulation while discrediting Alan Greenspan, his predecessor. Some are calling Volcker the "greatest central banker ever."
And his views on regulating big banks clearly has some support among those who know the industry well.
"We clearly should delineate between commercial banking and investment banking," said Nancy Bush, an independent securities analyst who follows bank stocks. "Bringing back Glass-Steagall at this point may be dialing us back too far. But Paul Volcker's general thought process right now is extremely correct and I don't know why people aren't listening to him."
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