Trump reopening Wall Street casino by weakening Volcker Rule

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Prohibiting Wall Street’s biggest, most dangerous banks from high-risk gambling with taxpayer-backed deposits, the Volcker Rule was one of the most important provisions of the 2010 Dodd-Frank financial reform law. It outlawed proprietary trading, which is Wall Street banks using other people’s money (depositors) to make socially useless bets to fund their bonuses.

Prop trading is like taxpayers giving Wall Street’s biggest banks a credit card with no limit and telling them to go to Las Vegas to gamble. Worse, Wall Street is also told that it gets to keep all the winnings and taxpayers will get the bill for all the losses.

No one would ever agree to that because it incentivizes Wall Street to make the biggest, highest risk bets because they have only upside and no downside. They get to shift their losses to taxpayers like they did in 2008. That’s why Wall Street loves prop trading. And that’s why the Volcker Rule prohibits it — to protect taxpayers and the financial system.

As we mark the 10th anniversary of the catastrophic 2008 financial crash, this is no time to return to the failed and discredited policies of the past which deregulated Wall Street. However, if the recent Volcker Rule proposal is finalized as proposed, there can be little doubt that will happen and there will be a substantial increase in prop trading at Wall Street’s biggest banks.

This will mostly be unseen due to the innumerable ways the proposal intentionally blinds regulators by eliminating reporting requirements and the broad-based delegation to the banks to self-police, as Better Markets’ detailed in a comment letter opposing the changes. With billions of dollars on the line, it is simply wrong to go back to a “trust us” model of regulation where regulators defer to Wall Street to comply with financial protection rules.

While imperfect, the Volcker Rule has worked well. First, it has reduced dangerous, high-risk and socially useless speculative trading funded by federally insured deposits. It has made the biggest Wall Street banks more stable and better positioned to have capital available as a shock absorber for losses and downturns. Third, it has forced Wall Street’s biggest banks to shift their activities away from socially useless gambling and instead focus on supporting the productive economy, which is, after all, the only reason they are supported by taxpayers in the first instance. Thus, the proposal to weaken the Volcker Rule threatens to snatch defeat from the jaws of victory.

It should be no surprise that this is the opposite of what the American people want. They suffered and continue to suffer from the economic, social and political costs and consequences of the catastrophic 2008 financial crash, caused in part by the very proprietary trading that the Volcker Rule prohibits.

That’s why recent polling shows that Americans strongly support either maintaining current financial protection rules or making them stronger. That’s why they want candidates for public office to talk about these rules when they discuss their economic agenda. That was also evidenced in the 2016 presidential campaign, when Donald Trump sold himself to voters as the most anti-Wall Street candidate since FDR in the 1930s.

The fact President Trump has flip-flopped and effectively merged his White House with Wall Street doesn’t change those facts. His mindless pursuit of a reckless and dangerous deregulatory agenda is not what the American people want and is not good for the country. Like his track record with casinos in Atlantic City, Trump’s administration’s proposal to reopen the casinos at Wall Street’s biggest banks by weakening the Volcker Rule will also fail. Unfortunately, rather than just Trump’s casinos filing bankruptcy and stiffing his contractors and workers, this time it’ll be taxpayers and the American people getting stuck with the bills. That’s reason enough not to weaken the Volcker Rule.

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Volcker Rule Dodd-Frank Policymaking