Future Investment

Two years after the implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, five federal regulatory agencies approved the Volcker Rule, which will go into effect in July of 2015. Named after former Federal Reserve chair Paul Volcker, this furiously contested policy will ban proprietary trading and other risky investments that do not benefit the depositors of Wall Street’s largest banks. Supporters believe that the Volcker Rule will finally put an end to the “too big to fail” issue that plagues the US’s financial system, while opponents claim that proprietary trading is vital to the health of capital markets. In light of recent financial crises and the general waywardness of many Wall Street financiers, it seems clear that the American public should recognize and oppose Wall Street’s talent for evading regulation. The implementation of the Volcker Rule currently faces too many obstacles in order for it to function effectively. Nevertheless, the premise of the policy demonstrates great potential, and should not be dismissed or abandoned. Originally intended to go hand-in-hand with Dodd-Frank’s financial reform policies by putting an end to the dangerous accumulation of capital by large firms such as J.P. Morgan Chase and Bank of America, the Volcker Rule faced substantial opposition in even its drafting stages. Lobbyists, who the “Time Magazine” called, “the second biggest corporate special-interest bloc after the health care complex,” spent almost half a billion dollars a year on lobbying, according to the Center for Responsive Politics. After years of political and social dispute, all that remains of the original proposal now is a diluted and ambiguous set of guidelines that even Volcker himself called, “too complex.” Furthermore, the Volcker Rule currently mandates that in order to prevent other kinds of risky trades, regulators must ambiguously evaluate each and every transaction. In addition, it requires that investment banks monitor their own trading. As it will be nearly impossible for the five assigned regulating agencies to enforce every aspect of the rule, much of the enforcement and regulation will be left to the banks themselves. This approach is almost certain to fail, as demonstrated by the infamous London Whale incident, when J.P. Morgan Chase recorded losses of over $5 billion and simultaneously exposed the shocking consequences of improper bank regulation. It will be long before anyone can tell whether or not the Volcker Rule can do its job, and in the meantime, President Obama and Congress need to continue to push for Wall Street reform. The Volcker Rule is only the first step towards improving the state of the American economy. Wall Street knows now that its actions will eventually be met with proper consequences, because if speculative proprietary trading continues, the $15 trillion worth of assets that the eight largest financial institutions in the US already controls will continue to grow and put us past the point of “too big to fail.” Further regulation with intent and resolution similar to the Volcker Rule will be essential to avoiding another financial disaster. We need legislation that brings to light the shady and risky actions of financial firms and closes loopholes within current regulations, as well as a revision of the Volcker Rule that separates the lending and trading arms of the banks. Although such action is always confronted by a powerful opposition, the ability for large investment firms to drag down and endanger an entire economy historically never ends well. There will need to be some changes to the way that the Volcker Rule is enforced, but the primary goal of reducing the financial dependence and control of these banks remains the same. If the Troubled Assets Relief Program of 2008 tells us anything, it is that $1 billion in further enforcement and compliance costs is little compared to a $475 billion bailout. Whether through financial crises or the increasing economic inequality between Wall Street and Main Street, these large investment firms have reached a point of much-needed supervision.