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Is the "Volcker Rule" More Than a Marketing Slogan?

After a tough argument, Paul Volcker appeared to have finally persuaded Obama that the unconditional bailouts of 2008-2009 planted the seeds for another major economic crisis. But how deep does this conversion go?
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At the broadest level, Thursday's announcement from the White House was encouraging -- for the first time, the president endorsed potential new constraints on the scale and scope of our largest banks, and said he was ready for "a fight." After a long, tough argument, Paul Volcker appeared to have finally persuaded President Obama that the unconditional bailouts of 2008-2009 planted the seeds for another major economic crisis.

But how deep does this conversion go? On the "deep" side is the signal implicit in the fact that Volcker stood behind the president while Tim Geithner was further from the podium than any Treasury Secretary in living memory. Where you stand at major White House announcements is never an accident.

Increasingly, however, there are very real indications that the conversion is either superficial (on the economic side of the White House) or entirely a marketing ploy (on the political side). Here are the five top reasons to worry.

  1. Secretary Geithner's spin on the Volcker Rule, Thursday night on the Lehrer NewsHour, is in direct contradiction to what the president said. At first, it seemed that Geithner was just off-message. Now it is more likely that he is (still) the message.
  2. The White House background briefing on Thursday morning gave listeners the strong impression that these new proposals would freeze the size of our largest banks "as is." Again, this is strongly at odds with what the president said and seemed -- at the time -- to indicate insufficient preparation and message drift. But who is really drifting now, the aides or the president?
  3. At the heart of the substance of the "Volcker Rule," if the idea is literally to freeze the banks at or close to their current size, this makes no sense at all. Why would anyone regard twenty years of reckless expansion, a massive global crisis, and the most generous bailout in recorded history as the recipe for creating "right" sized banks? There is absolutely no evidence, for example, that the increase in bank scale since the mid-1990s has brought anything other than huge social costs -- in terms of direct financial rescues, the fiscal stimulus needed to prevent another Great Depression, and millions of lost jobs. On reflection, perhaps the president really still doesn't get this.
  4. Since Thursday, the White House has gone all out for the reconfirmation of Ben Bernanke, whereas gently backing away from him -- or at least not being so enthusiastic - would have sent a clearer signal that the president is truly prepared to be tough on big banks and their supporters. Unless Bernanke unexpectedly changes his stripes, his reappointment at this time gives up a major hostage to fortune -- and to those Democrats and Republicans opposing serious financial reform.
  5. As the White House begins to campaign for the November midterms, how will they answer the question: What exactly did they "change" relative to what any other potential administration would have done in the face of a financial crisis? How will they counter anyone who claims, citing Rahm Emanuel, that: "The crisis is over, and we wasted it." No answer is yet in sight.

The Geithner strategy of being overly nice to the mega-banks was not good economics and has proven impossible to sell politically -- the popular hostility to his approach is just common sense prevailing over technical mumbo jumbo.

But selling incoherent mush with a mixed message and cross-eyed messengers could be even worse.

Cross-posted with The Baseline Scenario.

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