Volcker's Hand Seen In Obama's New Bank Plan

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Paul Volcker is often described as one of President Obama's top economic advisers, but until Thursday he wasn't playing a big role in the administration's efforts to overhaul financial regulations. The administration announced a policy change that is straight from Volcker's handbook. It's even being called the Volcker rule.


From NPR News, this is ALL THINGS CONSIDERED. I'm Madeleine Brand.

People who closely watch the White House and its policies say something changed yesterday. President Obama proposed new rules to curb the growth of banks.

And as NPR's John Ydstie reports, that signals the reemergence of a legendary financial thinker as a major player in White House policy.

JOHN YDSTIE: Eighty-two-year-old Paul Volcker is a hard man to ignore. He's six feet seven inches tall, has a big voice and is the closest thing to a superhero in the world of economics. As Federal Reserve chairman back in the early 1980s, Volcker grabbed a dangerous inflation dragon by the throat and strangled it.

But after naming Volcker the chairman of his Economic Recovery Advisory Board more than a year ago, President Obama seemed to have tuned him out for most of the past year. That is until the president announced his new bank reforms yesterday.

President BARACK OBAMA: I'm proposing a simple and common sense reform, which we're calling the Volcker rule after this tall guy behind me. Banks will no longer be allowed to own, invest or sponsor hedge funds, private equity funds or...

YDSTIE: Volcker had been advocating restrictions on risky bank behavior in speeches, interviews and testimony for much of the past year, including in this appearance late in September before the House Financial Services Committee.

Mr. PAUL VOLCKER (Chairman, Economic Recovery Advisory Board): I would prohibit them from sponsoring and capitalizing hedge funds, private equity funds and I would have particularly strict supervision enforced by capital and collateral requirements toward proprietary trading in securities and derivatives.

YDSTIE: But the White House point person on regulatory reform, Treasury Secretary Timothy Geithner, seemed to have a different view. During a September 10th visit to Capitol Hill, he said proprietary trading by banks wasn't a big factor in the recent financial crisis. Simon Johnson, a former chief economist at the International Monetary Fund, now at the Peterson Institute, believes Volcker's reemergence is significant.

Mr. SIMON JOHNSON (Senior Fellow, Peterson Institute for International Economics): This is a dramatic change in policy away from the Geithner approach, which has been followed over the past year, which is primarily being very nice to banks, towards the Volcker approach, which is being tough, but I think very fair and completely reasonable.

YDSTIE: Some skeptics dismissed the administration's new proposal as politically calculated bank bashing. Indeed it was announced as Goldman Sachs, a bank that received billions in government support reported record profits and huge bonuses. And it came a day after a populist backlash in Massachusetts handed Ted Kennedy's Senate seat to a Republican. Nonetheless, Simon Johnson thinks the administration's move could shift the debate and reinvigorate a bogged down financial reform effort in Congress.

John Ydstie, NPR News, Washington.

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