Regular followers of Senate doings will no doubt be astonished to learn that the "Volcker Rule" rolled out with much ceremony and applause just 12 days ago has run into stumbling blocks on both sides of the aisle in that august body, according to dealReporter, a news service whose article was published in the Financial Times:
Senate Banking Committee ranking member Richard Shelby (R-AL) said he opposes the so-called Volcker rule and the Obama administration’s call to levy a USD 90bn tax on banks. His comments come as House Financial Services Committee Chairman Barney Frank (D-MA) predicted the proposals outlined by President Obama could be law within six months.
Speaking to this news service on Thursday, Shelby said if Democrats push forward with the proposals they risk unravelling much of the bipartisan support already reached regarding the passage of financial regulatory reform in the Senate. Shelby said that the Obama administration risks losing Republican support for the bill if they begin to “politicise” the issue.
However, Shelby said he expects to hold a meeting with Banking Committee Chairman Chris Dodd (D-CT) regarding the way forward on regulatory reform in two weeks time. A Democratic banking committee staffer confirmed that the meeting between Dodd and Shelby will be critical as Dodd needs to determine the level of bipartisan agreement and the timing of bringing the bill through committee and on the Senate floor.
Here's how bipartisan "agreement" works: Keep diluting whatever legislation is being considered to meet the demands of Republicans so that some of them will support the final product. Bring the diluted measure to a vote. Watch as the Party of No Way, No How votes like the Borg against the diluted measure.
So, imagine if you will, that the Volcker Rule went one step further. Not some DFH plan concocted by me and my democratic socialist pals, but the proposal of a banker:
The third, and greatest, problem with Wall Street - which the Volcker plan doesn't address - is its dominance by trading. Trading is necessary to provide liquidity, but through the explosion of derivatives and the rise of computerized "fast trading," Wall Street's operations have become "rent seeking." Trading operations scoop wealth out of the economy without giving any useful service in return. That's how Wall Street bonuses got so huge; in times of cheap money like the present, the profitability of a trading business with a substantial market share goes through the roof.
Most of those profits depend on insider information - not insider information about company activities (the use of which would be illegal) -- but insider information about trading flows (where the money's coming from and where it's going). Traders have always used this; you can't make it illegal. However, in a world where trading volume has zoomed skyward, insider information about money flows has become exceedingly valuable. What's more, unlike in most businesses, greater market share provides you with exponentially higher profits - it's more than twice as valuable to control 20% of the trading as to control 10%.
The Volcker plan does nothing about this. The best solution would be an ad valorem transactions tax, a "Tobin tax" of, say, 0.05% on every trade. This wouldn't add much cost to legitimate investing, but it would make the "fast trading," scooping a few cents per share on millions of trades a day, completely unprofitable. That in turn would return Wall Street to banking and corporate finance (arranging deals and raising capital) the businesses that actually have a value for the economy.
You know exactly how long that idea would survive in the Senate Banking Committee. But not to worry. It won't even be suggested.