If Diogenes were to conduct a search for an honest man within the Treasury and Economics arena of Obama's administration, he very well might find Paul Volcker as the only one of that caliber. Being honest and credible does not make one an expert of today's situation.

Paul has been advocating the return of the son of Glass-Steagall which incorporates the separation of commercial and investment banking. The 82 year old Volcker has certainly been marginalized working with the Larry Summers and Boy-Geithner crowd; but, he still has his opinions as to what will work. For example:

“The banks are there to serve the public,” Mr. Volcker said, “and that is what they should concentrate on. These other activities create conflicts of interest. They create risks, and if you try to control the risks with supervision, that just creates friction and difficulties” and ultimately fails."

Yves believes that Volcker is wrong and not because it can't be done; but she believes that after 30 years, the process is to lenrthy to untangle the securization which has taken place. The TBTF are not TBTF becaus of their size; but, they have assumed a role withing the economy that once eliminated would create a void. Separating the two would not resolve the issue and it would not resolve the role of derivatives in today's economy.

<link> "Paul Volcker, Mervyn King, Glass-Stegall, and the Real TBF Problem." Yves Smith

Despite spending many hours reading about the financial crisis, I am not an expert on banking, and neither are you. Even the "experts" may be wrong. But something needs to be tried. We may not be experts as far as recommending ideal solutions, but we are experts insofar as we recognize what has broken down and needs fixing. But the Obama administration so far isn't fixing anything, and the banking system continues in its semi-frozen state, but unreformed; most of the larger banks would be recognized as insolvent had mark to market rules not been suspended. The investment banks (e.g., Goldman) are up to their old tricks. The whole thing is kind of a hoax, a sham--perpetuated at taxpayer expense. Really fixing the system would undoubtedly cause a lot of pain at first, so we hush up and continue the humbug.

But honestly, I don't know if Volcker is right or wrong. I think securitization caused a lot of problems and allowing 30 to 1 leveraging even more problems. Bailouts have compounded the problems by introducing moral hazard and postponing the day of reckoning. But the average citizen is dimly aware of what's going on, suspects and often distrusts government, and is withdrawing from the system. Is that what govt. wants? I don't think it is healthy for our democracy to allow bankers to disctate terms to govt. and for average people to be locked out of decision making. So Volcker is right when he says “The banks are there to serve the public”. At least that's the way it ought to be. If a "liberal" Democrat administration gives into the bankers, what hope is there?

diogene:

If it was, we would not be having this discussion. Whaht we are arguing about is how to fix the economy. Some would like to slam the breaks on and skid into a solution. The other extreme is the "market will fix itself." Somewhere in between there is a solution.

When people begin to discuss expertise of themselves and the person to whom they direct their comments; it is usually done in an attempt to debase the discussion. No, I am not in the same room as Volcker or Summers; but, I am probably two rooms over. Expertise is typically based upon information.

"... the system will have to break down catastrophically before anything effective can be done. I really hope I am wrong on this one."

She can really, really, really hope, but it won't change the fact that she's right.

Remember those guys we used to see on The Ed Sullivan show, the ones who would get 20 or 30 plates spinning on sticks, one at a time, and by the end of the act they were running back and forth barely able to reach the ones that were wobbling and about to fall?

The issue from where I stand looks to be what it has always been, that the way the big boys resolve the tight spots they put themselves and the rest of us in, is to wipe out the people at the bottom.

Volcker is 110% right. A regular bank is there to safeguard savings and make simple loans that yield interest. That's it.

An investment bank is there to go into start-ups and ventures and deals and high-risk things.

The public needs to be protected. Now and before as in the '30s. Fast-talking crooks tore down the barriers. Partly it was because they wanted in on John Q Public's stash and pension funds.

Off with their heads!

Obama failed to right this mess. One of many failures. I see no successes at all. He fell for the fast-talking guys from Harvard simply because of their image. He seems to be just one more of them. Kennedy did about the same, but they gave him economic success and JFK was harder to BS; he actually had his own ideas. The last thing USA needed was a high-class community-organizer.

Everyone, even in the banking community, was ready for the overhaul, ready to right the ship, and then they just pretended it wasn't sinking after all. Obama is starting to do something right, he's starting to put money behind smaller banks; we never needed to bail out the behomoths, but we did need to rescue the midsize banks who were already walking the line... if we had done that from the git-go, we would have solved the dilemma, instead of exacerbating it. No need to untangle the derivatives, let them swallow the big guys whole and turn the money creation system to fund real estate and mid size banks (= main street jobs) and watch the whole economy turn around. Instead, they ripped off stock holders, oversold bonds, bankrupted the states, laid off the masses, stole the pensions, re-pumped new money into the stock market, fabricated another jump in oil, and set us up big time for another fall. Everything that wasn't working was stepped up, everything that could have saved us was ignored. Obama will go down in history as the president who brought in world depression through naivity and ignorance.

Is dividing the finance industry into depository institutions and investment banks sufficient to avoid economy wrecking catastrophes and atrocious misalignment of incentives? I suppose half of a 16 oz porterhouse would be easier to swallow than the whole thing. It might even be possible to ingest the fillet portion without requiring the Heimlich maneuver. Downing the rest, bone and all might provide a significantly greater challenge. There's a fundamental problem with the manner in which large investment banks deal with their customers, their creditors, their investors, the rating agencies, other financial institutions and the government, and none of those are solved simply be separating the depository portion of the business from the riskier portion.

I call BS. The banking community may have pretended they were ready for an overhaul and might have even swallowed one while they were completely desperate, but much of that opportunity probably disappeared before Obama took office when early spending of the TARP funds and desperate injections of liquidity into the banking system by the Federal Reserve staved off complete collapse. The course was already set before Obama entered office.

As for bringing on the World depression. That, or at least an American depression was pretty much made invevitable by the policies followed for decades under multiple presidents and largely outside of their control. American's simply make too little and spend too much, and pile up too much debt to avoid an adjustment on a massive scale.

I think the key here is that, once the components of the so-called "banks" are separated, it is only necessary to preserve the purity of the fillet. The other component, which I believe is appropriately called the "New York Strip", is a gambling venture which can be allowed to rot if it loses its way.

there was a big build up to an announcement by Geithner of how he was going to enforce TARP and banking reform... all hands were on deck and when we got the big speech - all he said was.... I'm working on it. THEN everyone went back to same old, same old. But, we thought we was getting an overhaul. Otherwise, I think your perspective is spot on... in hindsight.

I have a different idea on what is causing world depression. I think the money masters have fallen complacent and no longer care to push for the greatest growth possible. There are needs out there not being met, which could be making some billionaire extra billions... but he/she is complacent with the billions in hand. The robber barons were industrious thieves, today's thieves are sleeping dogs by comparison. Although I agree with your points on American consumption, this paper money tosses simple math out the window... back in the days when money was a regulator of trade, productivity counted for something, but now that we print our money out of thin air... Wall Street rules the industrialized world from the top, sort of the same way an operating system sits on top of a BIOS. It is wizardry in motion.