Some Common Sense at Last about Banks- Volcker

This strikes me as the right approach.

Volcker Calls for Restricting Banks’ Risk, Trading Activity – WSJ.com
The comments reflect Mr. Volcker’s long-held view that banks should act more in line with their traditional role and not take extremely risky gambles, which could threaten the viability of commercial banks and expose the Federal Reserve and taxpayers to large risks.

People keep yapping on about how the financial systems is the “circulatory” system of the economy.  Fine.  Then by extension, the amount of risk we have been allowing into the commercial banking systems is akin to eating four hamburgers every day for every meal, and then doing amphetamines, adn then running a marathon while smoking and hoping it won’t give us a heart attack.

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1 Comment

Filed under Banking, economics

One response to “Some Common Sense at Last about Banks- Volcker

  1. dmargolin

    I like your analogy.

    One thing that I think obscures the debate is the use of the term “risk.” The word implies extreme positives (bold, innovative leaders are “risk takers”) and extreme negatives (poorly thought out strategies are “risky”) and thus, in my opinion, suggests that risks can “cancel each other out.”

    But, as your medical analogy suggests, this is not true. If any one of those risky behaviors can kill us, it doesn’t really matter how much “upside” we get out of the ones that don’t.

    I think we should describe financial decision-making in terms of being “experimental.” Experiments, like risks, can turn out well or not so well. But regardless of how well individual experiments do, it is obvious that there is a limit to the aggregate number of experiments one can undertake at a given point in time. In recent years, the financial industry tried too many experimental ideas all at once, and so, naturally, the system failed.

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