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Volcker and G30

     It was a big Sunday in New York yesterday. Not only did Bloomingdale's open its 1st foreign department store in the United Arab Emirates (with a local emporium as partner), but Paul Volcker wrote an op-ed article in the Times on financial reform. He began with two old favorites, the risk of moral hazard after a generalized bailout of banks and lots of other kinds of institutions (AIG, Morgan Stanley) and quoted Adam Smith in favor of keeping banks small.

     Then Volcker, who now has the ear of the president at last, went on to note that smallness to protect again the destruction of the economy from a bank failure is not “feasible in today's world”. This leads to safety nets which absolutely should not cover activities like “ownership or sponsorship of hedge funds and private equity funds, and proprietary trading that is, placing bank capital at risk in the search of speculative profit rather than in response to customer needs.”

     Some experts believe the Obama-Volcker proposals mean banks will fail to make enough money to continue to operate because they will be denied the chance to do deals that put their profits at risk. David Goldman (aka Spengler) thinks that unless the banks are allowed to run hedge funds or trade for their own accounts, they will turn into “zombies” like the Japanese banks during the decades-long deflation there. But Volcker thinks most banks are able to make money doing what banks always have done, taking deposits and lending the money out, and ending the incentives federal bailouts provide to excesses in risk-taking and leverage.


     To protect against what Volcker calls “outliers”, ones too big to fail because they threaten the financial system if they fail, he proposes a supervisor to limit their capital and leverage. In effect this would be (surprise, surprise) the Fed, backed up by better clearing and settlement systems and accounting reform. If big banks nonetheless look like crashing, we need a new “resolution authority” authorized to intervene if a systemically-critical capital market institution is on the brink of failure.

     He proposes that we work with other nations with large financial markets on necessary reforms. The institution for this already is in place: the Group of 30, a global combo of private banks, central banks, academics, and international institutions founded with Rockefeller Foundation money in 1978 by Geoffrey Bell, a neighbor and friend. Based in Washington with a budget of a half million dollars/year, it funds two gatherings of the 30 experts per year. The G30 is chaired by Paul Volcker and a year ago produced a proposed package of measures to get the world out of its financial crisis not seriously different from what Volcker just wrote.

     The G30 includes central bank governors and ex-governors besides Volcker, amont them Jean-Claude Trichet of the ECB, and the CBs of Mexico, Britain, Brazil, Italy, Poland, China, Japan, Switzerland, and Israel. Its academic members include Larry Summers, Paul Krugman, Martin Feldstein, and Kenneth Rogoff, and Marina v.N. Whitman and Sylvia Ostry among the emerita members. Private sector reps (many of them also top drawer economists) come from TIAA-CREF, Goldman, JP Morgan, Santander, Lazard, Citi.

     Your editor has expressed doubts about the willingness of the advertisement-reimbursed press to question the Exchange-Traded Fund phenomenon. Today's Wall Street Journal report (4th section) tells it like it is with a story about snags in ETFs and the rise of premiums and discounts in their pricing. Its Eleanor Laise points out that there is really a 2-tier market in ETFs, with the top-ten accounting for about 60% of total trading.

     In fact much of the rush into the creation of ETFs is a marketing phenomenon, and the credentials of the creators prove it. From facebook to fund management in one easy step. To learn more about ETFs, you can buy our new take-no-prisoners report on the subject of Exchange-Traded Portfolios, for sale at

     Reader AK from TX revealed what he had been trading in the commodity pits for Uncle Sam back in the 1970s. It was GNMA futures. On Day 1 (Cot. 20, 1975) he had a bunch of orders to fill from GNMA itself. This does not prove anything about the Fed buying common stocks, something asserted by Barron's Round Table guru Marc Faber.

     *Did I call the bottom on gold this year? watch this spot.