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Alan Greenspan confessed he did not know what happened when the housing bubble burst. Paul Volcker did. Why the difference between these two otherwise distinguished chairmen of the Federal Reserve? Greenspan presided over two bubbles; Volcker merely observed. One learned something; the other didn’t. That matters hugely, for the future of our country in its response to terrorism is at stake.

Simply stated, the Volcker Rule bars banks from speculating in the markets. Banks framed this practice as proprietary trading, to camouflage the fact that they had become market traders—which has no relationship with their basic purpose of managing money supplies and flows. With the repeal of the Glass-Steagall act, which had specifically provided commercial banks with government backing, it was no longer clear where government backing existed. Regardless of purpose, all banks were now free to speculate as they wished. And several were too large to fail. That did not immunize them from losses; as it happened, however, it did immunize them from bankruptcy.

Volcker was deeply involved in the passage of the financial reform bill (Dodd-Frank Bill) on 16 July 2010, an election year by the way. The bill fell short of what he wanted, but it still contains enough teeth to have a positive effect on the financial system. The most important separation of investment from commercial banks of Glass-Steagall was basically restored. What it should have also dealt with, but did not, included Wall Street compensation practices, misleading accounting, and incompetent credit rating. Only time will tell how effective the financial reform act will be. The Volcker Rule is the modern incarnation of the Glass-Steagall Act.

As badly needed as it is, it does very little for the deep recession. That problem may well be beyond solution until a new crisis arises that not only unites the political parties in a common purpose, but also involves a mood change by American business and the electorate.

Harry Rosenberg


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