The "Volcker rule"
is a simple thing. Basically, it says that if you're a bank that takes deposits
and benefits from federal deposit insurance, you can't also make risky trades
that might blow up your bank and cost the taxpayers a bundle. Wall Street never
liked the rule, because banks make a lot of their money these days trading for
their own accounts and didn't want their trading profits cut off. They fought
the idea in Congress, but in the end, the Dodd-Frank bill that passed in 2010
included a version of the Volcker rule in its final draft.
Was this a victory for
common sense? Hardly. Last month regulators unveiled their first take on the
actual implementation of the Volcker rule, and it had become a monster. "Only in today's
regulatory climate could such a simple idea become so complex, generating a
rule whose preamble alone is 215 pages, with 381 footnotes to boot,"
complained American Bankers Association Chief Executive Frank Keating.
Poor banks! But step back
for a moment. How did Paul Volcker's baby get so bloated? Keating's
crocodile tears aside, the answer is: banks. When it comes to financial
regulation, fighting against new laws is merely their first line of defense.
When they lose, as they did in the Dodd-Frank battle, the action simply moves
to the regulatory agency charged with implementing the law. James Stewart explains what happened next:
When the proposed
regulations for the Volcker Rule finally emerged for public comment, the text
had swelled to 298 pages and was accompanied by more than 1,300 questions about
400 topics.
…"Here's the key word
in the rules: 'exemption,'" former Senator Ted Kaufman, Democrat of
Delaware, told me. "Let me tell you, as soon as you see that, it's
pronounced 'loophole.' That's what it means in English." Mr. Kaufman, now
teaching at Duke University School of Law, earlier proposed a tougher version
of the Volcker Rule, which was voted down in the Senate. "We've been
through this before," he said. "I know these folks, these Wall Street
guys. I went to school with them. They're smart as hell. You give them the
smallest little hole, and they'll run through it."
This is probably the biggest
reason that no one should take too seriously Republican complaints about
burdensome regulations strangling the economy. The truth is that most reformers prefer fairly
simple rules. In the tax world, they'd prefer to simply tax all income. In the
environmental world, they'd prefer to set firm limits for pollutants. In the
financial world, they'd prefer blunt rules that cut off risky activity at its
knees.
But businesses don't like
simple rules, because simple rules are hard to evade. So they lobby endlessly
for exemptions both big and small. This is why we end up with tax subsidies for
bow-and-arrow makers. It's why we end up with environmental rules that treat a
hundred different industries a hundred different ways. It's why financial
regulators don't enact simple leverage rules or place firm asset caps on firm
size. Those would be hard to get around and might genuinely eat into bank
profits. Complex rules, conversely, are the meat and drink of $500-per-hour
lawyers and whiz kid engineers. If the rules are complicated enough, smart
lawyers can always find ways around them. And American corporations employ lots
of smart lawyers.
Keep this firmly in mind the
next time you hear someone from the Chamber of Commerce complaining about how
many thousands of pages of regulations they have to comply with. Some of that
is inevitable: We live in a complex world, and that means the rules are
sometimes complex too. But they don't have to be anywhere near as complex as
they end up being. We could have a simple tax code, simple environment rules,
and blunt financial regulations. We could probably cut the size of agency
regulations by 10 times if we wanted to.
But businesses don't want
to. Sure, they'd prefer no regulation at all, but they know that's not in the
cards. So in public they bemoan complexity, but in private they fight endlessly
for more of it. To their lawyers, every single extra page is an extra
opportunity to make more money.
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