Not Too Big to FailO
On the surface, the Volcker rule makes sense. The government should not let the banks run free, doing whatever they wish to do, endangering other people's money with risky proprietary trades that are made with the expectation that they, the federal government, will swoop in and save the day when those trades don't work out. The notion that banks should be deregulated when things go well and regulated when the bad debt of these financial institutions is raging out of control is both inconsistent and disingenuous.
I would suggest an alternative approach, an approach that would only gain consensus in an alternative universe. The government should announce that its pockets are bare and that regardless of how poorly financial institutions are doing, regardless of how many jobs are lost, regardless of how much money is lost, financial institutions will no longer be bailed out by the government. The world will be put on notice that these financial institutions need to stand on their own two feet in much the same way as a young adult is told by his parents that they will no longer lay out the money that this irresponsible offspring gambled away the night before.
Does this mean that I was opposed to the bailout during the financial crisis? Look at all the money that was paid back, the argument goes. My answer is to grit my teeth and say no, I understand the reasons the bailout was implemented. But I also understand that the bailout produced the unwelcome consequence of the government becoming more of an enabler than it already is.
Last week, when I was in the airport waiting to board my plane, I noticed a store that devoted half of one wall to displaying cartons of cigarettes. I've never smoked, but if I were to be hit one day by an uncontrollable urge to do so, I would be forced to read in large, bold print on every carton of cigarettes (and, I would imagine, every pack): "Smoking kills." I can still smoke if I want to, but I can never claim that I wasn't aware of the consequences of my actions.
Investors should be given a similar warning. When someone buys a stock or a house or any other risky venture, s/he should be greeted by the following message: This is a risky investment! You can lose some or all of your investment! Your house or your stock can go down in value! And if it does, don't expect the government to make up the difference!
See my WSO blog