On Tuesday, banking will change forever.
Regulators from five different agencies have come to agreement on the terms of the Volcker Rule, and they will each formally vote to adopt the once-thought-to-be-dead rule by Dec. 10.
The rule, which weighs in at 950 pages, was initially intended to reduce the risks at banks. But it has since morphed into a political battle writ large, with many turf wars over agency overlaps — all with precious little attention given to economic outcome.
In the ultimate twist of irony, the Fed, which assisted Jack Lew’s Treasury in writing most of the rules, may have made it even harder to wind down QE.
That’s because the Volcker Rule will essentially remove the banks from the system as a significant source of liquidity, leaving only the Fed as the predictable buyer of America’s financing instruments.
New underwriter-in-chief Janet Yellen has been publicly supportive of the rule, but she may find her freshman year as Fed chairwoman made more difficult by the actions of previous Fed chairmen, Paul Volcker and Ben Bernanke.
Volcker’s instincts may have been correct: to essentially take us back to a Glass-Steagall Act world that separated deposit-taking banks from risk-taking investment banks.
But economic growth requires capital, and the Volcker Rule will diminish that vital component. The regulation will dramatically curtail the capital-formation process by drastically reducing — almost eliminating — a bank’s ability to invest its own capital in the economy.
Consumer banks and investment banks often invested alongside company founders to provide capital to grow.
Take Facebook, for example. In January 2011, when the company needed more capital to grow, Goldman Sachs helped it raise $1.5 billion, of which $450 million was Goldman’s own money.
Facebook went public in May 2012. Yes, Goldman made a few bucks, and it will pay taxes on it. But more important, today Facebook employs around 6,000 people.
As tapering and the Volcker Rule are implemented, they could act as a dual-pronged economic tightening, requiring a new need for QE to replace that liquidity.