A recent post by my friend Steve Bainbridge reminds me that I’ve been meaning to weigh in on the most recent in a long line of controversies surrounding the Volcker rule, whose provisions are scheduled to be implemented on July 21, 2012. Almost no one believes that the federal agencies will have finalized the necessary rules prior to that time, which has generated a rush of accusations, panic, and grand standing.
For example, Barney Frank has called on regulators to simplify and finalize the Volcker rule prior to Labor Day. SEC commissioner Troy Paredes and former FDIC Chairman Sheila Bair have argued that the rule is so complicated that agencies should repropose it and start all over again. And a bipartisan group of senators has offered a bill that would relieve financial firms from compliance with the Volcker rule until one year after regulators have finalized their rules.
I’m largely on board with Steve’s general analysis of the rule, but I want to push back against his contention that regulators have taken Congress’s simple ban and turned it into an unworkable monstrosity at the behest of relentless industry lobbying. This charge has been taken up by a number of sources lately (see here and here), including by some self-serving members of Congress.
Let’s get one thing straight: Congress did not enact a simple rule – it enacted a short rule. By definition, a rule that purports to ban proprietary trading while maintaining an active role for banks as financial market intermediaries, including as market makers, is not a simple rule.
Yes, the Volcker rule is a complex muddle and the costs may not be worth the benefits – as I discuss in some detail here, the Volcker rule is perfectly laudable in concept but presents many implementation and enforcement challenges. And, as I’ve documented at length, industry lobbying of agencies charged with Volcker implementation has been both persistent and extensive since the day Obama signed the legislation, if not before.
But, both of these results were predictable, indeed virtually inevitable, given the original statute. Moreover, this sort of blame shifting onto unelected officials is exactly what I’ve been predicting ever since Dodd-Frank passage.
Just because you’re short doesn’t mean you’re cute. It doesn’t mean you’re simple either.
Update: Steve argues that I misinterpreted his original post:
(1) My reference to the "original Volcker rule" linked back to a post discussing Paul Volcker's original suggestion, not the version incorporated into Dodd-Frank. (2) I noted that "the process of turning the simple original proposal into law has turned into a classic example of legislative and regulatory sausage making." I thus had no intention of complimenting Congress for its work in Dodd-Frank. To the contrary, I intended to suggest that both Congress and the regulators were at fault. Indeed, I've agreed all along with Kim's observation that the regulatory mess was "predictable, indeed virtually inevitable, given the original statute."
My apologies to Steve for misunderstanding his original post, and for lumping him in with others who have made the "blame the regulators" argument. I'm not so sure that Volcker’s original “I know it when I see it” approach to prop trading would have been all that workable in practice, either, but that’s a post for another day.