Now in its eleventh season, “NCIS” remains the top television program in the country. An audience favorite involves the recurring humorous references to team leader Gibbs’ “Rules.” They are meant to instruct his new investigators and contain such experience-based wisdom as: Never go anywhere without a knife; never, ever, involve lawyers; never assume; and, sometimes you’re wrong.
Each rule had a number, but part of the running joke is that they sometimes changed numbers (or seemed to), there were rules without numbers, and it was never clear just how many rules there were.
Gibbs’ “Rules” provide a touch of humor in a series portraying serious crimes and their often grisly aftermath. By contrast, there is nothing funny at all about the “rules” the federal government makes up to implement laws.
The proposed federal regulations covering speculation and securities trading by banks provide a fine example of complexity in pursuit of simplicity. One rule in particular, called the Volcker Rule, is deeply burdened by its history of political wrangling and difficulties in describing what it meant. After a series of political mini-dramas — “It’s in; it’s out; it’s back in” — Congress left it out of the Dodd-Frank financial reform bill they passed. President Barack Obama requested that they put it back in; they did and it became law in January 2010.
What it meant, exactly, was left to the regulators to define in the rules.
After three and a half years of dithering, we still don’t know exactly what it means. In trying to come up with workable definitions for prohibited activities, they have succeeded in making the Volcker Rule even more complicated than it was initially. Even its namesake, Paul Volcker, the renowned former chairman of the Federal Reserve who created the rule, has said that he wishes it were a simpler law. Still, barring intervention, the Volcker Rule is set to go into effect in April.
Of course, we did have a simpler law on the books until the inside-the-beltway crowd of regulators and legislators decided it was too old-fashioned and getting in the way of progress. It was called the Glass-Steagall Act. Passed in 1933 in the wake of the financial crash that caused 11,000 banks to fail and plunged us into the Great Depression, the law separated banks into two groups: commercial banks that had fiduciary responsibility to depositors; and investment banks that were responsible solely to their owners.
Glass-Steagall seemed to work pretty well, but Congress and the Federal Reserve decided that its simple approach no longer reflected the reality of financial markets. The Fed argued that the law put U.S. banks at a disadvantage compared with their European competitors.
As the 20th century closed, Congress jettisoned Glass-Steagall and brought banking “up to date.” Banks swelled up with mergers, acquisitions, and securities trading. Our luck ran out nine years later when the new financial system imploded and our now-supersized banks had to be put on federal life support.
Passed in 2009 in the wake of the Great Recession caused by our financial system’s implosion, Congress passed the Dodd-Frank Act. It imposed an impressive number of new rules and regulations on banks, stirring up a great deal of work for lawyers but failing to address the key issues of systemic risk and “too big to fail.” More importantly, even with all of its rules, it failed to sustain the distinction between banks that have fiduciary responsibility and those that do not.
People are rarely at their best when they have made a mistake, and institutions react in much the same way. Congress and the Federal Reserve clearly made a mistake in tossing Glass-Steagall overboard, but neither will admit it.
The monster banks created by the previous Congressional “fix” in 1999 are now clearly unmanageable, especially in their trading operations, precisely the area that the Volcker Rule was designed to address.
The problem with the Volcker Rule is that in attempting to define financial transactions in a way that allows “good” trading but prohibits “bad,” Congress ends up creating a kind of board game that pits regulators against some of the sharpest legal minds in the country.
The solution would be to take the Volcker Rule at its word. It prohibits “proprietary trading” of financial assets. Proprietary means ownership, so if you want to be a commercial bank you can’t own a trading operation. It’s not complicated.
Admitting our mistake will not be easy; neither will unwinding its consequences. We have created a world of monster banks and incalculable risks, still kept alive by taxpayer transfusions. Separating commercial banks would not be easy, but it’s the right thing to do, for the economy’s health and our own good. It’s simple.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Herald Business Journal.
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