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The financial world is in a spin once more. In the space of three days last week, the Dow Jones lost 550 points, or five per cent. Bankers are back in the dock. The markets have awoken with a shock to the fact that the US public wants blood, and the political elite in Washington knows that it has to assuage that anger, somehow.
That is what lay behind the chaotic scenes on Thursday, when the Obama regime unveiled its plan to crack down on risk-taking on Wall Street.
The so-called Volcker rule will go down in history as a political expedient, rather than a policy move. We know that for certain because if it was a piece of Obama Administration policy it would have contained useful things such as "details." Instead, all we got were a few unspecific paragraphs about limiting the size and scope of banks, and then a lot of rhetoric.
That's why the financial world was in a spin. Markets don't like uncertainty; it's difficult to price. At best, the financial world can guess at how the Volcker rule might look when it finally reaches the American statute book – and then throw many millions into an unholy lobbying effect to influence the outcome. But it could be worse: the anti-Wall Street fervour on American streets could continue to grow. Some five per cent of the Dow could be just the start of it.
Did the Obama Administration and the US Treasury want this chaotic reaction? After all, stock prices going up is supposed to be good for public confidence, and vice versa.
The temptation is to say "yes." There were so few details in the Volcker release – and US treasury officials were so poor at providing additional information in follow up briefings – that the authorities were clearly happy for chaos to follow. Yes, my belief is that they wanted the news to hurt people in finance.
One aspect of the crisis and its aftermath has been the absence of any contrition. No one has taken responsibility. And in the absence of that – along with the view that the financial sector has just gone back to its old tricks – public anger has grown.
If the banks on Wall Street really are broken up, it is the bankers who will have brought this down on their own heads.
Now, whether that is a good idea is another matter entirely. One thing is for sure: the rule of unintended consequences is going to be applied in multiple, uncertain directions.
But in the meantime, however the banks squeal or claim the Volcker proposals to be unworkable, there are some respected analysts ready to stand up and say: "Yes, the banks had it coming." Charles Dumas, from Lombard Street Research said: "The furore over bankers' bonuses illustrates one aspect of current financial market conduct that has wide implications: the casual slippage back to "normalcy", interpreted as business-as-usual 2007-style. It seems clear to us that normalcy is a long way off [if it has ever existed]. Indeed, complacency in many quarters about economic recovery, and the illusion of normalcy, is itself a reason why renewed economic and financial trouble, probably crisis, is likely.
"The drop in bank shares on Friday on the announcement of new regulatory plans by Obama, originated by former Fed governor Volcker, is a classic case of blinkers falling from the eyes of financial markets that have been amazingly credulous of delusions in recent years [if not always]. One thinks of the Latino debt farrago [countries can't go bankrupt], the high-leverage, saving-and loans bubble, the tech bubble, as much as the recent alphabet-soup mortgage bubble. These were obvious cases where a little scepticism, and willingness to look at situations from multiple perspectives, seemed to be beyond the reach of market participants, or their educators."
He believes the Volcker rule will reduce conflicts of interest and provide a natural curb on excessive remuneration. But he also knows that some things – like the proposed ban on proprietary trading – will be difficult to implement and will need ongoing intrusive regulatory oversight – "a good thing in itself, since the financial industry has for too long lived in a solipsist, self-referencing world that precludes self-discipline".
So, on Dumas' view, banker pay should come down from the sky, the regulators should move in and the rules should apply to all financial institutions of a significant size – not just deposit-taking institutions. Next up he'd like to see the Volcker rule adopted across all other financial centres outside the US: "The lack of international co-ordination has been lamented in some quarters. But it was always a chimera. A strong lead from a man like Volcker is so obviously vastly superior to prolonged negotiations with a bunch of muddle-headed continental Europeans, who do not understand and dislike finance in the first place, that we should all emit a sigh of relief on that point. The British will behave much more justifiably like "poodles" (a much maligned breed, by the way) on this issue than on others in recent years, and the rest can just follow along.
"President Obama probably feels he has had a bad week. But it may prove to have been a good one for world welfare."
On that last point we can only say: "We'll see."
- The author is Associate Editor of the Financial Times
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