Reasonable people have seen enough to say that Washington is incapable of drawing bright lines and applying clear rules fairly across all securities markets. The result is all but certain to be a final rule that different people will interpret different ways, leading to loopholes for traders and arbitrary enforcement.
Under this Beltway rendering of Volcker, trading will continue but with a much higher bureaucratic cost and with the illusion of safety that only regulation can create. Until the government is willing to create a durable financial system that allows failure, the best policy response is to make the rules so simple that even Washington can enforce them. That means higher, even very high, bank capital standards and margin requirements on risky trades between banks. Those aren't panaceas, but they offer more hope for taxpayers than the bureaucratic and bank-lobbyist jump ball that is now the Volcker Rule.I am frustrated with what I am learning about the financial reform legislation (Dodd-Frank). In the interest of compromise (or should I say giving special interests what they want), Volker was watered down and punted to the admin. What we have is weak, confusing, and worst of all has the illusion of safety.
While some blame goes to Republicans and moderate Democrats for blocking a strong Volker Rule, I think the lions share of the blame goes to Democrats in Congress. They were unable to create an easy bright line rule. As if trying to conform to stereotypes, they created excessively long and confusing legislation. But also legislation that punts to the admin and forces them to create longer and more confusing rules.
This isn't good policy. And it doesn't make Democrats look good.
