Five former Secretaries of the Treasury who served in both Democratic and Republicans administrations are urging Congress to enact the Volcker Rule. Named after former Federal Reserve Chairman Paul Volcker (pictured), who has been the leading advocate of this regulatory approach, it would prohibit commercial banks from engaging in certain risky activities. Whether the secretaries' collective weight will sway legislators despite opposing pressure from the powerful financial services lobby remains to be seen."Banks benefiting from public support by means of access to the Federal Reserve and FDIC [Federal Deposit Insurance Corp.] insurance should not engage in essentially speculative activity unrelated to essential bank services," the former secretaries wrote in The Wall Street Journal Monday.
The letter, signed by former Treasury chiefs W. Michael Blumenthal, Nicholas Brady, Paul O'Neill, George Shultz and John Snow, acknowledged that the restriction of proprietary trading activity by banks is only one part of comprehensive financial reform.
"It is, however, a key element in protecting our financial system and will assure that banks will give priority to their essential lending and depository responsibilities," the secretaries said.
Glass-Steagall by Another Name
Hedge funds and private equity funds trading for speculative gains should be "free to compete and to innovate," the secretaries added, but like other private businesses, they should "also be free to fail without explicit or implicit taxpayer support."
The Volcker Rule, proposed by President Barack Obama in late January, would prevent banks that take advantage of cheap federal funding from investing their own money in financial markets, a practice which is known as proprietary trading. The plan also calls for new limits on the size and concentration of financial institutions.
Both moves sound a lot like provisions of the Glass-Steagall Act, which was repealed in 1999. Glass-Steagall became law after the Great Depression, and with the effects of the Great Recession still being felt across the nation, more people are realizing the wisdom in that act, thanks to Volcker.
The Volcker Rule would also prevent banks from making speculative investments that don't benefit their customers. Banks would also be limited from using borrowed money to fund their own expansions.
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