Tags: Paul | Volcker | Euthanasia | Financial

Volcker: We Need Euthanasia for Financial Companies

By    |   Tuesday, 23 Feb 2010 02:34 PM

White House economic adviser Paul Volcker recommends euthanasia for non-bank financial institutions that threaten the financial system.

“If a big, non-bank institution gets in trouble and threatens the whole system, there ought to be some authority that can step in, take over that organization and liquidate it or merge it – not save it,” the former Federal Reserve chairman said.

“It's what I call euthanasia, not a rescue,” he told CNN.

That would be a solution to “moral hazard,” the idea that big financial companies will take excessive risks, knowing that the government will bail them out if things turn sour.

“This is what we pushed, what the president has accepted,” Volcker said. He was referring to President Barack Obama’s proposal to prohibit banks from proprietary trading – trading for their own accounts.

“They shouldn't be doing highly speculative activity,” Volcker said. “They shouldn't be doing so-called proprietary activity, where they're off there trading for their own interest. They're trading to make money.”

The problem now is that financial company executives earn huge bonuses by taking outsized risks. “That’s fine if you're not being protected by the government,” Volcker said. But that’s not the case now.

Former Treasury Secretary Henry Paulson criticizes the Volcker rule for being too narrow.

It “would not have prevented the collapse of Fannie Mae, Freddie Mac, Lehman Brothers, American International Group, Washington Mutual, Wachovia or other institutions whose failure contributed to the crisis,” he wrote in The New York Times.

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White House economic adviser Paul Volcker recommends euthanasia for non-bank financial institutions that threaten the financial system. If a big, non-bank institution gets in trouble and threatens the whole system, there ought to be some authority that can step in, take...
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Tuesday, 23 Feb 2010 02:34 PM
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