Paul Volcker Prevails

Paul Volcker, legendary central banker turned radical reformer of our financial system, has won an important round.  The WSJ is now reporting:

President Barack Obama on Thursday is expected to propose new limits on the size and risk taken by the country’s biggest banks, marking the administration’s latest assault on Wall Street in what could mark a return — at least in spirit — to some of the curbs on finance put in place during the Great Depression.

This is an important change of course that, while still far from complete, represents a major victory for Volcker – who has been pushing firmly for exactly this.

Thursday’s announcement should be assessed on three issues.

1. Does the president provide a clear statement of why we need these new limits on banks?  The administration’s narrative on what caused the crisis of 2008-09 has been lame and completely unconvincing so far.  The president must take it to the banks directly – tracing the origins of our “too big to fail” vulnerabilities to the excessive deregulation of banks following the Reagan Revolution and emphasizing how much worse these problems became during the Bush years.

2. Are the proposed limits on the total size (e.g., assets) of banks, or just on part of their operations – such as proprietary trading?  The limits need to be on everything that banks do, if they are to be meaningful at all.  This is not a moment for technocratic niceties; the banks must be reined in, simply and directly.

3. Is there a clear strategy for (a) taking concrete workable proposals directly to Congress, and (b) win, lose, or draw in the Senate, running hard with this issue to the midterm elections?

Push every Republican to take a public stand on this question, and you will be amazed at what you hear (if they stick to what they have been saying behind closed doors on Capitol Hill.)

The spin from the White House is that the president and his advisers have been discussing this move for months.  The less time spent  on such nonsense tomorrow the better.  The record speaks for itself, including public statements and private briefings as recently as last week – this is a major policy change and a good idea.

The major question now is – will the White House have the courage of its convictions and really fight the big banks on this issue?  If the White House goes into this fight half-hearted or without really understanding (or explaining) the underlying problem of unfettered banks that are too big to fail, they will not win.

About Simon Johnson 101 Articles

Simon Johnson is the Ronald A. Kurtz (1954) Professor of Entrepreneurship at MIT's Sloan School of Management. He is also a senior fellow at the Peterson Institute for International Economics in Washington, D.C., a co-founder of, a widely cited website on the global economy, and is a member of the Congressional Budget Office's Panel of Economic Advisers.

Mr. Johnson appears regularly on NPR's Planet Money podcast in the Economist House Calls feature, is a weekly contributor to's Economix, and has a video blog feature on The New Republic's website. He is co-director of the NBER project on Africa and President of the Association for Comparative Economic Studies (term of office 2008-2009).

From March 2007 through the end of August 2008, Professor Johnson was the International Monetary Fund's Economic Counsellor (chief economist) and Director of its Research Department. At the IMF, Professor Johnson led the global economic outlook team, helped formulate innovative responses to worldwide financial turmoil, and was among the earliest to propose new forms of engagement for sovereign wealth funds. He was also the first IMF chief economist to have a blog.

His PhD is in economics from MIT, while his MA is from the University of Manchester and his BA is from the University of Oxford.

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4 Comments on Paul Volcker Prevails

  1. I’m not hopeful, given Obama’s performance so far, but maybe he’s turning over a new leaf. Maybe he really will give us the change we voted for by reining in the banking oligarchy. We can’t have an economy where the only safe investment is Goldman Sachs.

  2. If Obama is smart, he would use this issue as the proverbial “pivot” to rescue his presidency from medocrity after the health care debacle.

    After being dissed by Obama for ten months, Volcker does indeed prevail.

    Volcker is the man…

  3. You really want deregulation then get rid of the Fed and FDIC.The banks are now a welfare industry.For years they have used taxpayer money under the guise of the Fed and FDIC.Regan did a half ass job of deregultion.He gave the banks freedom to gamble with FDIC deposits.Read 1/19/10 oped in the New York times written by a Regan advisor.

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