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February 23, 2010 at 07:00 PM
Political gridlock on Capitol Hill is keeping Congress from passing laws needed to govern financial institutions, renew the estate tax and shore up the Social Security trust fund, according to a former Federal Reserve chairman.
Paul Volcker, the Fed chief from 1979 to 1987 and the current head of President Obama’s Economic Recovery and Advisory Board, voiced this concern during a recent question-and-answer session with financial reporters at a retirement savings event hosted by AXA Equitable Life Insurance Company, New York.
“We have an abnormal legislative situation because of the level of partisanship,” Volcker said. “I hope that financial regulation doesn’t get bogged down in this very contentious political environment. As a practical matter, I think we need a strong legislative directive.”
The country needs regulations that would prohibit deposit-taking institutions from engaging in activities such as proprietary trading and investing in private equity funds and hedge funds, Volcker said. He is backing a proposal, introduced by President Obama in January and known as “the Volcker rule,” that would prevent commercial banks from owning and investing in hedge funds and private equity funds. The proposal also would limit the trading that commercial banks do for their own accounts.
“These proprietary activities–the great triad of hedge funds, equity funds and proprietary trading–are not customer-related activities,” Volcker said. “To the extent they are customer-related, they create conflicts of interest. There is already plenty of risk in commercial banking. Do we really want to add more risk that is not central to the functions of the banks?”
Echoing previous public comments, Volcker also called on Congress to grant the federal government “resolution authority”: the power to take control of, merge or liquidate financial institutions that pose a “systemic risk” to the economy because their failure would threaten the financial system. He noted, however, that few “systemically important institutions” exist outside of the commercial banking and life insurance sectors.
