President Obama's handpicked chairman of the Economic Recovery Advisory Board, Paul Volcker, warned Congress last week that the Obama/Geithner plan to overhaul Wall Street regulations would codify the concept of too big to fail. Volcker, the former chairman of the Federal Reserve during the Reagan years, testified before Congress on Thursday that the regulation reform plan developed by the White House and Treasury now in the House Financial Services Committee could lead to more taxpayer bailouts.
Yep, one of the president's own economic advisers is now willing to point out the screen door on the submarine. The systemic risk plan is a design flaw doomed to failure. Mr. Volcker told Congress:
The clear implication of such designation whether officially acknowledged or not will be that such institutions . . . will be sheltered by access to a federal safety net in time of crisis; they will be broadly understood to be 'too big to fail.'
The Wall Street Journal wrote in response to this testimony:
We don't agree with all of Mr. Volcker's prescriptions—nor he with ours—but on too big to fail he's exactly right. As he also told Congress, regulators are unlikely to correctly guess which firms will pose systemic risk, and the implicit protection by taxpayers could put firms not deemed important by Washington at a market disadvantage.
Regulations need to change. But the current plan in Congress is only going to turn the nation's "most important financial institutions" into government sponsored enterprises. I can't stop stressing enough the fear of JP Morgan Mae and Citi Mac if the Obama/Geithner plan goes through unchanged.