Friday, November 05, 2010

The Volker rule

would prohibit banks from trading for their own profit. Felix Salmon explains why it's a good idea.
the explicit thinking behind the Volcker Rule is that there are good and bad ways for a bank to become globally competitive. The bad ways involve taking unnecessary risks with taxpayer money. The point of the Fed’s discount window is to provide a funding source for banks to make loans into the broad economy, not to provide a near-zero cost of funds for proprietary bets. And no bank in the world will deliberately cross-subsidize its lending operations with its prop-trading profits.

Shuttering prop desks, writes Bachus, “will cause these firms to be less profitable”. Well, yes. That’s a feature, not a bug. We don’t want financial institutions to be profitable: they’re middlemen, and their job is to help capital flow to where it can best be put to work, rather than to retain as much of that capital as possible for themselves, in the form of profits and bonuses. [Emphasis added - Russ]

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