A roundup of economic news from around the Web.
- The Volcker Idea: Former vice chairman of the Federal Reserve Board, Alan Blinder gives his take on the Volcker rule in the WSJ, saying I am waiting to see if what is really the Volcker idea can be translated into a workable Volcker rule. It is devilishly difficult to draw bright lines between proprietary trading and trading, hedging, and market-making on behalf of clients. Mr. Volcker himself said that ‘you know it when you see it,’ suggesting an analogy with pornography. The problem is, often you don’t. Furthermore, the firms that take the biggest proprietary trading risks are not banks at allor at least not real banks, with depositors and all that. (I am not naming names.) Yet some of these firms are too big to fail, whether we like it or not. If they gamble and lose big, we taxpayers may find ourselves on the hook again, which is why we need resolution authority. So I’m waiting for the details of a fleshed-out Volcker rule. After that, we’ll see if anyone can convince 60 senators of its wisdom.
- Financial Reform: On the New York Times op-ed page, Henry Paulson explains his financial regulatory reform solution: First, we must create a systemic risk regulator to monitor the stability of the markets and to restrain or end any activity at any financial firm that threatens the broader market. Second, the government must have resolution authority to impose an orderly liquidation on any failing financial institution to minimize its impact on the rest of the system. Together, these two reforms will enable the regulatory system to better prevent the kinds of excesses that fueled our recent crisis, restore market discipline and keep the failure of a large institution from bringing down the rest of the system My preference is for the Federal Reserve to be the systemic risk regulator, because the responsibility for identifying and limiting potential problems is a natural complement to its role in monetary policy. Congress, however, seems to be moving toward having a council of regulators perform this function. While that is not my preference, I believe a council can be workable if it is led by either the Treasury secretary or the Fed chairman, and is structured to ensure that strong decisions are reached quickly in a crisis.
- Strained States: A new PEW report looks at some of the ways the Great Recession may have changed states, both short and long-term. States have weathered the ups and downs of 10 economic slumps since World War II, but none with the scope of the Great Recession. Its toll can be measured with a big number: the more than $300 billion in budget gaps states have faced since the start of the recession in December 2007 The recession is amplifying pressures on elected officials to make essential long-term changes so states can live within their means yet still educate children, keep people safe and create jobs. But 2010 is an election year, and politicians seeking another term may be loath to tackle such volatile issues as reforming the tax structure or public employee pensions for fear of backlash to higher taxes or reduced retirement benefits. The typical pattern after a recession is to muddle through until the economy recovers, then return to cycles of increased spending when revenue goes up. But officials in a number of hard-hit states will not have that option this time because of the gravity of the downturn. In the long-term, its possible that the recession will impose permanent changes in the size of government and in how states deliver services, who pays for them and which ones take priority in an era of competing interests.