The Base Line Scenario summarises the chairman of the Economic Recovery Advisory Boards views on financial regulation:
1. The financial sector does not add anywhere near as much social value as its proponents claim.
“The question that really jumps out for me is, given all that data, whether the enormous gains in the financial sector — in compensation and profits — reflect the relative contributions that sector has made to the growth of human welfare” (from NYT story)
2. Too big to fail banks are alive and well – and this poses a major problem to our future prosperity.
“There is an expectation that very large and complicated financial institutions will not be allowed to fail,” he said. “Unless that conviction is shaken, the natural result is that risk-taking will be encouraged and in fact subsidized beyond reasonable limits.”
Massive public anger at the banks has increased Volcker's standing in the Obama administration and most reports indicate that he has the President's ear. Stringent financial regulation is an absolute necessity if the economy is going to have a sustained recovery. Allowing the banks to carry on as the were, fattened from tax payers money and bolstered by the fact that they have a limitless credit supply from the Federal Government, is a recipe for another giant recession.
Volcker is one of the few people in office with the experience and knowledge to create a framework for financial reform and it is highly important his ideas are used when enacting change.
As the calls for serious reform grow, so will the lobbying efforts from the banks. It'll be a war worse than health care, but one just as important. Get ready to fight.