Although he pushed for more financial regulation when he was chairman of the Federal Reserve, Paul Volcker told the New York Times that he regretted staying silent while some big deregulation efforts were occurring.

In a feature story on the front of the Sunday Times' business section, Volcker said that he regrets not saying anything when his successor at the Fed, Alan Greenspan, campaigned to weaken the Glass-Steagall Act, which Bill Clinton repealed outright in 1999. According to the Times, the Glass-Steagall Act “forbade commercial banks (what are now, for example, Citibank, JPMorgan Chase and Bank of America) and investment banks (like Goldman Sachs and Morgan Stanley) from mingling plain-vanilla products like savings accounts, mortgages and business loans with the more high-octane, high-risk endeavors of trading.”

Volcker believes that the repeal of the Glass-Steagall Act was one of several factors that led eventually to the current financial crisis.

At INET, one of our goals is to re-examine and re-imagine the fundamental theories of economics that inform financial regulations, like the current reform bill and the Glass-Steagall Act, in order to avoid future financial crises. 

The Times continues about Volcker's regrets surrounding the Glass-Steagall Act:

“Although Mr. Volcker opposed the repeal, he didn’t go public with his concerns. ‘It is very difficult to take restrictive action when the economy and the financial markets seemed to be doing so well,’ he says of his silence at the time. ‘But eventually things blew up.’”

Today, Volcker regrets staying silent on this and other deregulation efforts, and in the spirit of the Glass-Steagall Act, has introduced what is now known as the “Volcker rule” into the financial overhaul bill that’s making its way through the Senate right now. The rule initially sought to ban banks from engaging in proprietary trading. But through compromise, an outright ban has been watered down to limiting banks to investing 3% of their capital into proprietary trading practices, and Volcker considers that an unfortunate and potentially dangerous loophole.

The financial reform bill, complete with a diluted Volcker rule, was nonetheless already passed by the House, and will be voted on in the Senate this week.

Many in the INET community believe that for this reform bill to succeed, economists and policy-makers need to critically re-examine the fundamental theories upon which our financial systems are built. At our inaugural conference at King’s College, we had a panel discussion about this very issue, during which economists such as Mark Thoma and Joseph Stiglitz spoke about the theories underlying financial regulatory efforts.

Here is a video of Mark Thoma’s discussion at the panel:

For more video of our inaugural conference at King’s, please go here.

Peter Leyden

Director, INET Online