James Crotty, Gerald Epstein, and Iren Levina have co-authored an article regarding financial reform, the “Volcker Rule,” and the real cost of propriety trading. Here is the introduction to the article:
President Obama’s endorsement of the “Volcker Rule” — a set of proposals designed to reduce public financial support for risky proprietary trading and hedge/private equity fund ownership by commercial banks and bank holding companies — has elicited an intense chorus of criticism from bankers, economists and policy makers. These critics make three main claims. First, proprietary trading had little to do with the current financial crisis and therefore restricting it would do little to prevent a replay; and second, proprietary trading provides a very small percentage of bank revenues and therefore is not significant. Third, Volcker’s very narrow limits would make it easy for bankers to evade the restrictions.
We argue that conventional banker wisdom is incorrect: proprietary trading had a great deal to do with the crisis and it also contributes significantly to major bank revenue. Yet, critics are right to argue that the Volcker rule has to be strengthened and broadened, specifically to large investment banks and the shadow banking system, in order to significantly reduce the risk in the system to acceptable levels and to limit the likelihood of the need for future taxpayer bail-outs.