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Sunday’s New Yorker (VIII)

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Annals of Economics

The Volcker Rule

Obama’s economic adviser and his battles over the financial-reform bill.

by John Cassidy

On the evening of Wednesday, June 23rd, Paul Volcker, the former chairman of the Federal Reserve, was monitoring events on Capitol Hill from his office, which overlooks the ice-skating rink at Rockefeller Center. Volcker, who is eighty-two years old, works at a polished granite desk covered with correspondence, books, and financial reports. Apart from a slight loss of hearing, he is in robust health, and when he rises to greet guests he towers above them. His height (six feet eight inches) is initially intimidating, but that impression is soon mitigated by his wry manner. For a year and a half, Volcker, who serves as an economic adviser to President Barack Obama, had been waging a campaign to curb greed and speculation on Wall Street. This effort was reaching a climax, as the Senate and the House of Representatives worked to reconcile the lengthy financial-reform bills that each had passed.

Volcker retired from the Fed in 1987, and during the latter years of the tenure of his successor, Alan Greenspan, he was widely regarded as an out-of-touch fuddy-duddy. In the previous six months, however, he had emerged as a de-facto arbitrator for the various factions involved in financial reform: the lobbyists, the politicians, and the public-interest advocates. Barney Frank, the Democratic congressman from Massachusetts, who helped lead the process of reconciling the House and Senate bills, told me in late May, “When the banks come to me opposing various things, I say to them, ‘If I were you, I would go and see Paul Volcker. If you can persuade him, you might have a chance. I think you are not going to see anything in this bill that Paul objects to.’ ”

Frank had set June 25th as the deadline for finishing the bill, and during the final two nights of negotiations Volcker still appeared to be playing the role of esteemed referee. His main goal was to preserve the so-called Volcker rule, which barred banks from speculating in the markets—a practice known as proprietary trading—and from operating and investing in hedge funds and private-equity funds. Volcker believed that if such a policy were effectively enforced it would go a long way toward restoring the legal divide between commercial banking (the issuance of credit to households and firms) and investment banking (issuing and trading securities). That split existed from the Great Depression until the repeal of the Glass-Steagall Act, in 1999. Before the repeal, commercial banks were given government protection in case things went wrong, and investment banks were given freedom to do what they wanted with their money. Afterward, everyone was given the freedom, but it was no longer clear where the government safety net ended.

Volcker believes that commercial banks, such as Citigroup and Wells Fargo, are worthy of receiving government assistance—and even, in extremis, taxpayer bailouts—because firms and consumers depend upon them for credit. In return for these enterprises being sheltered, they should refrain from risky activities such as proprietary trading and sponsoring hedge funds. “If you are going to be a commercial bank, with all the protections that implies, you shouldn’t be doing this stuff,” Volcker said to me. “If you are doing this stuff, you shouldn’t be a commercial bank.” Read more in The New Yorker.



by William Finnegan

When the topic is illegal immigration, some of our political leaders reliably produce more heat than light. On April 28th, in a letter to President Obama, seventeen members of Congress, most of them from the Southwest, demanded immediate action to increase border security, noting that “violence in the vicinity of the U.S.-Mexico border continues to increase at an alarming rate.” Two days earlier, Senator John McCain, of Arizona, in a floor speech defending his state’s newly passed law requiring local officers to investigate individuals’ immigration status, described “an unsecured border between Arizona and Mexico, which has led to violence, the worst I have ever seen.” He went on to cite numbers for illegal immigrants apprehended last year “that stagger.”

In fact those numbers are surprising: they are sharply down, according to the Border Patrol—by more than sixty per cent since 2000, to five hundred and fifty thousand apprehensions last year, the lowest figure in thirty-five years. Illegal immigration, although hard to measure, has clearly been declining. The southern border, far from being “unsecured,” is in better shape than it has been for years—better managed and less porous. It has been the beneficiary of security-budget increases since September 11th, which have helped slow the pace of illegal entries, if not as dramatically as the economic crash did. Violent crime, though rising in Mexico, has fallen this side of the border: in Southwestern border counties it has dropped more than thirty per cent in the past two decades. It’s down in Senator McCain’s Arizona. According to F.B.I. statistics, the four safest big cities in the United States—San Diego, Phoenix, El Paso, and Austin—are all in border states.

The problem of illegal immigration isn’t a matter of violent criminals storming the walls of our peaceful towns and cities. It’s a matter of what to do about the estimated eleven million unauthorized residents who are already here. The mass-deportation fantasies of some restrictionists notwithstanding, the great majority of “illegals” are here to stay. That is a good thing, since they are, for a start, essential to large sectors of the economy, beginning with the food supply—the Department of Labor calculates that more than half the crop pickers in the United States are undocumented. National business leaders have no illusions about these basic facts of economic life. Last month, Mayor Michael Bloomberg formed a coalition of big-city mayors and chief executives of major corporations—including Boeing, Disney, Hewlett-Packard, and even Rupert Murdoch’s News Corporation—to lobby Congress for comprehensive immigration reform, including a path to legal status for all undocumented immigrants. Bloomberg calls the current immigration policy “national suicide.”

There are reasons to be uneasy about illegal immigration. In some industries, dirt-poor newcomers lower wages. State and local budgets suffer when workers are paid under the table. The fact that people lack legal status is itself disturbing. The huge immigration surge of the late twentieth century is the first in our history in which many, if not most, immigrants have come here illegally. Yet anti-immigrant backlashes don’t always track closely with actual immigration. They track with unemployment, popular anxiety, and a fear of displacement by strangers. They depend on woeful narratives of national decline, of which there is lately no shortage. Scaremongering works. Even as illegal immigration is falling, recent CBS/Times polls show that the number of respondents who consider immigration a “very serious problem” is rising—from fifty-four per cent in 2006 to sixty-five per cent this May. Read more in The New Yorker.

Written by Theophyle

July 25, 2010 at 4:11 pm

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