Financial reform in doubt as pro-Wall Street forces step up battle

The man often credited with successfully ending America's long struggle with inflation in the 1980s issued a stern warning to the world's bankers that they aren't doing enough -- or doing the right things -- to prevent further economic collapses.

The warning from Paul Volcker, who chaired the Federal Reserve from 1979 to 1987, came as the US House of Representatives began a debate on a broad financial reform package that some critics say does not do enough even as Wall Street banks say it does too much.

In two successive talks over the past two days, Volcker slammed Wall Street bankers over their "outlandish bonuses" and questioned whether all the de-regulation of the financial sector in recent decades actually increased financial innovation, as bankers claim when they oppose stricter regulation.

“Has there been one financial leader to say this is really excessive?" Volcker said on the topic of pay bonuses, as quoted at the Times of London. "Wake up, gentlemen. Your response, I can only say, has been inadequate."

Many economists say Volcker's policy of fiscal tightening in the early 1980s brought the United States out of the spiral of "stagflation" it experienced through the 1970s, allowing the US economy to begin growing again after a decade of inertia.

Volcker argued that the stock market rally that took place this year is threatening the momentum to make necessary changes to the the US's and world's financial structure that could prevent future bank collapses.

“The rally in world stock markets from recession loans has brought renewed hopes on Wall Street ... for a return to outlandish bonuses for financial operators and vigorous defense of established vested interests,” Volcker said at a meeting of European conservative parties in Germany, according to the Wall Street Journal. “Those hopes and positions must not distract us from what needs to be done."


And indeed Volcker's words seemed prescient as news came out Wednesday that Congress' proposed financial reform faces serious opposition in the House of Representatives, as pro-Wall Street Democrats push amendments to the bill, some of which are seemingly designed to gut the bill of its ability to regulate big banks.

House Republicans are generally opposed to the financial reform bill, regardless of amendments.

Reuters news service reports that Rep. Walt Minnick (D-ID) has proposed an amendment that would eliminate from the bill the creation of the Consumer Financial Protection Agency, which would protect consumers' interests when dealing with financial institutions. The creation of the CFPA is seen as a reaction to the public anger over sub-prime mortgages, which saw banks hand over high-interest house loans to people the banks likely knew would not be able to afford them.

Another amendment, this one from Rep. Melissa Bean (D-IL), would give the CFPA the power to pre-empt state financial laws when those laws are tougher than federal rules. That amendment is widely seen as an attempt at weakening financial regulations.

House Financial Services Committee Chairman Barney Frank, who supports the CFPA, "accused the New Democrat Coalition of blocking the bill because its members are being prodded by big banks to abolish the Consumer Financial Protection Agency and to allow major financial institutions to avoid state laws tougher than federal regulations," reported Ryan Grim at the Huffington Post.

"The big banks in particular are trying to get more preemption," HuffPo quoted Frank as saying. "It's a state-consumer battle with the big banks. We want compromise. They want to offer an amendment that makes it easier to preempt state consumer laws."


In his speeches this week, Volcker called for a return to a long-standing policy, eliminated a decade ago, that separated commercial banking from financial trading. That law, known as the Glass-Steagall Act, was brought into force in the 1930s during the Great Depression, as a reaction to the bank collapses during that economic crisis.

The Glass-Steagall Act was repealed in 1999. Many economists now argue that the breakdown of the barriers between commercial banking and securities trading contributed to last year's financial collapse.

As Mike Ellis reported at the Washington Independent on Monday, there is a growing movement advocating the reinstatement of Glass-Steagall. US House Rep. Maurice Hinchey introduced a bill Monday that would do exactly that. Under Hinchey's bill, the major Wall Street banks would have to choose whether they want to be commercial banks or securities traders.

Reinstating Glass-Steagall is not a part of the financial reform bill being championed in the House by Rep. Frank. Some critics of the financial reform bill argue that the bill in its present form could actually make things worse by creating a "permanent bailout mechanism," which would mean the government would be obliged to bail out struggling banks in the future.