Market Talk

It doesn’t take much for bloggers to start bashing something or someone. But pay close attention when they start dishing out praise, because they’re generally on to something good.

Focus has turned to former Fed Chairman Paul Volcker’s recent comments regarding big banks. He believes too-big-to-fail institutions should be broken up and wants the biggest banks to be prohibited from owning and trading risky securities. From NYT:

Mr. Volcker’s proposal would roll back the nation’s commercial banks to an earlier era, when they were restricted to commercial banking and prohibited from engaging in risky Wall Street activities.

The Obama team, in contrast, would let the giants survive, but would regulate them extensively, so they could not get themselves and the nation into trouble again. While the administration’s proposal languishes, giants like Goldman Sachs have re-engaged in old trading practices, once again earning big profits and planning big bonuses.

His views, which are gaining praise among bloggers, certainly contrast opinions of other members on President Obama’s economic team, who favor letting big banks survive, but extensively regulating them.

More subtly, Mr. Obama has in Mr. Volcker an adviser perceived as standing apart from Wall Street, and critical of its ways, some administration officials say, while Timothy F. Geithner, the Treasury secretary, and Lawrence H. Summers, chief of the National Economic Council, are seen, rightly or wrongly, as more sympathetic to the concerns of investment bankers.

For all these reasons, Mr. Volcker’s approach to financial regulation cannot be just brushed off — and  [Austan] Goolsbee, speaking for the administration, is careful not to do so. “We have discussed these issues with Paul Volcker extensively,” he said.

The administration’s stance prompts Big Picture blogger Barry Ritholtz to wonder if Obama can actually reform Wall Street in a successful manner, considering he’s taking advice from the likes of Tim Geithner and Larry Summers.

“It’s hard to see how when key presidential advisers are Wall Street creatures,” he says.

Still, Ritholtz believes Obama needs to seriously start listening to Volcker. “The sooner team O starts listening to Tall Paul, the better off they – and the country – will be.”

Volcker isn’t the only prominent voice arguing too-big-to-fail institutions need to be broken up.  Bank of England Governonr Mervyn King lashed the “too-big-to-fail” concept in his speech yesterday.

“Just when our biggest banks thought they were out of the woods and into the money,” the heat’s turning up, former IMF chief economist Simon Johnson writes at The Baseline Scenario.

Big banks will push back, Johnson notes, “but King’s words mark the beginning of a new stage of real reform; the consensus starts to crack.”