St. Louis: Paul Volcker, a special adviser to President Barack Obama, said on Monday that prospects for reform of the derivatives market are good, despite attempts by some market participants to keep the more profitable parts from being moved to clearinghouses and exchanges.
Speaking at Washington University in St. Louis, Volcker also said he believed there was broad legislative support for a proposal he crafted that would prevent banks from engaging in proprietary trading. The ban, dubbed the “Volcker rule,” surprised financial markets when Obama proposed it in January.
These days, legislators are generally on board with the idea, which also extends to barring investment banks and other entities from holding banking licenses and getting access to loans from the Federal Reserve, he said.
“Should commercial banking institutions engaged in providing those essential services and within the ‘safety net´, be permitted to engage in strictly proprietary and risky activities - trading, hedge funds, and private equity funds?” he said in a speech.
“Should the investment banks, the insurance companies, (or for that matter the finance arms of industrial firms) retain the banking license and access to the Fed provided in the heat of crises? I think not. More importantly, President Obama and the Administration have adopted that position. It now seems well embedded in the legislation process.”
Volcker’s assessment of the outlook for financial reform came as Senate lawmakers prepared to debate a sweeping bill that would overhaul rules for Wall Street less than two years after a credit crisis nearly sent the world’s biggest economy into a second Depression.
Unprecedented government intervention averted that outcome, but stronger regulation is needed to prevent future crises, he said.
“Of course, we want to limit regulation to those things that make sense,” Volcker said. “But equally, we simply cannot shy away from needed reforms simply because some particular interests are offended or because they seem to violate economic ideology.”
Volcker said he sees broad agreement that derivatives settlement and clearing should be brought on to exchanges and clearinghouses. Efforts to rein in the $450 trillion derivatives market, where lack of transparency and regulation were seen to have contributed to the crisis, is a centerpiece of the regulatory reform efforts.
“My sense is that the reform of the derivatives market will be largely successful,” he said. “The prospects are good for passage of a reform bill along the lines in the approach set out by the Senate Finance and Agriculture Committees, paralleling in large measure the bill passed by the House last year.”
For such reforms to be successful, international consensus is important and, he said, achievable.
Volcker, who is credited with taming inflation as US central bank chief in the 1980s, also gave his view on the economic recovery, which he said will be “a long slog.”
Fixing U.S. economic ills could be a matter of three or four years, he told reporters after the speech.
And with government spending on the rise, the U.S. will need to consider imposing new taxes, he said. Among options, he said, are a carbon tax, an energy tax, and “that awful value-added tax.”
The European-style of taxation, with levies imposed on goods at each phase in their production, is controversial in the US Volcker said last week that he did not think the tax was “on the political table” in the near future.