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The Volcker Rule = Job Creation.. NOT!
By Economic Forecasts & Opinions
Last Thursday, President Obama unveiled the toughest new restrictions yet on the nation's largest banks in the aftermath of the financial crisis. The proposal is called the “Volcker Rule”, in recognition of the former Federal Reserve chairman, Paul A. Volcker, who has been pushing the proposal for months.
Under the still sketchy Volcker Rule, referred to as “Glass-Steagall in spirit,” banks that take federally insured deposits or have the right to borrow from the Fed would be required to minimize the trading they do on their own account and give up their stakes in hedge funds and private equity firms.
In other words, banks can choose to engage in proprietary trading (prop trading), or be a traditional bank, but can't do both.
The plan has plenty of skeptics and it's too early to know whether it will win congressional approval. But the specter of new profit-crimping regulation was enough to batter the bank stocks sending the Dow Jones Industrial Average down 213.27 points, or 2%, to 10389.88, the biggest decline since last fall.
Right Direction, But…
In recent years, banks have bulked up their profits in areas way beyond the traditional banking. The far more profitable and risky investing banking units have grown dramatically and were at the heart of the financial crisis.
While a renewed focus on financial reform by the Obama administration is certainly a welcoming sign and in the right direction, it certainly does not address the more dire issue of the Middle America – jobs.
Moreover, the timing and haste of the proposal has drawn criticism that this is simply a transparent attempt at populism, as it came two days after voters in Massachusetts sent a Republican to the Senate depriving Democrats of the 60 votes often needed to prevent a Republican filibuster in the Senate.
Missing the Point
The Massachusetts defeat of the Democrat essentially signed, sealed and delivered the one-year report card of the Obama Administration.
While the nation was suffering through the worst economy since the Depression, the Democrats wasted a year on mis-directed priorities such as overhauling health care, expanding college aid, and reducing climate change, etc., while forestalling a much needed legitimate mass job creation strategy.
Poverty Expanded to Suburbs
A new study from the Brookings Institution found that in 2008, 91.6 million people—more than 30% of the nation’s population—fell below 200% of the federal poverty level.
From 2000 to 2008, the poor population in the U.S. grew by 5.2 million, reaching nearly 40 million, up 15.4%, a pace almost twice as fast as the increase in the total population.
Suburbs in the nation’s largest metro areas saw their poor population grow by 25%. Midwestern cities and suburbs experienced by far the largest poverty rate increases over the decade. (Table 1)
Falling Wages, Rising Inflation
The latest Consumer Price Index (CPI) rose at an annual rate of 2.7% with the core rate, in which food and energy are removed from the mix, rising 1.8%.
However, what hurt consumers the most was falling wages.
According to the Bureau of Labor Statistics, while average weekly earnings were up 1.9% year-over-year in December 2009, the real wage, adjusted for inflation, showed that buying power had dropped by 1.6%, the first year-over-year decrease since 2003.
Workers are also being squeezed from the lowest average number of hours worked in a week since 1964, while the underemployment rate (U6), a better gauge of the jobless picture, remains high at 17.3% as of last December, up almost 4% year-over-year.
Job Creation, Anyone?
Infrastructure and construction related spending typically plays a large role in economic recovery. While relatively modest government investments in stimulus construction are having some positive impact on the economy, the overall construction unemployment rate is still a staggering 22.7% as of December 2009, twice the national average and at the highest level in at least a decade.
Construction economists note that stimulus-related jobs gains in the industry have been more than offset by losses in non-residential construction and public works funded by state and local governments.
This just illustrates that more comprehensive and “add-on” job creation programs need to be strategized and implemented. That is, one job creation should lead to two or three more jobs, instead of special interest programs that create one new job while leading to two or three job losses in other areas.
Rhetoric & Substance
Nevertheless, from his recent speech, President Obama appears to be still on the path of mis-guided priority when he said that a jobs bill emerging in Congress must also include tax breaks for people trying to make their homes more energy efficient.
In addition, Senator Evan Bayh said in an interview on Bloomberg Jan. 23 that he expects
“Obama to use the Jan. 27 nationally televised address before Congress to embrace creation of a commission that would suggest spending cuts and tax increases that Congress would be forced to vote on.”
It seems obvious that the Administration will continue its seriously mis-aligned policies with the truth in observable reality. Soaring rhetoric notwithstanding, people grasp the difference between showmanship and substance.
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The system needs to be utterly destroyed.
This "investor" (sucker) won't ever be committing any funds to these crooks again and will be waiting with 5 gallons of gas and a Bic to support their models, businesses and agendas on the way to hell.
Nothing will change this sentiment until the entire FIRE economy is in ashes.
Let's argue about the headline.
That makes just as much sense as thinking that the Volcker Rule equates to Job Creation, which was the exact point of the article. A long, long time ago I wrote newspaper headlines and view this one as a good one. It is clever, entices reader interest, and captures the essence of the article. What more could you ask for?
Other than you, not sure the rest of us equate the Voker rule with Job Creation. Dumb headline
We are toast - We will double dip into depression by the end of 2010 and official U3 Unemployment even rigged will go to 15% and the real unemployment rate will go to about 28%. GDP will tank at least 10% after these coming stimulus induced fantasy positives.
I'm not sure what your headline has to do with your article. Did somebody else just randomly write it for you?
I was trying to point out the Volcker Rule was a mis-direction from the real issue. In this case, banks are scapgoats for failed job creation (not that I believe banks are absolved of all sins.) Guess the title is a bit cryptic..
A national goods and services tax (VAT) is the way to go. Just eliminate hundreds of thousand's of pages of inequitable tax rules that are generally skewed in political directions.
It's easy to blame others but the rule making that allowed this disaster, abomination, crisis all was made possible by politicians that were influenced by the most crass problem in politics - the next election cycle.
A simplified tax system coupled with a one term (6-year) limit for all political offices may help but, we are a point where most people will end up working directly for or supported directly by the government - then you're at the old George Bernard Shaw quote " A government that robs Peter to pay Paul can always count on the support of Paul" - we're about there.
asiablues,
Excellent, excellent analysis of how empty rhetoric will not address America's growing inequality.
Thank you.
Thank you, Leo. Admire your work as well.
Obama is an empty suit. He speaks well; but has nothing to say.
What one should note is that the core issue of sustainable jobs has to be the first priority....because the current system is trying to cover shortfalls of a bloated govt. tax scenario by further increasing taxes.....
Thi is identical to one owning an apple orchard whereby the govt. is cutting down the trees ....but yet demanding more apples....Pretty soon one only has one tree standing....but yet will have laws demanding that this tree pay more taxes than it has fruit....
The politicians and current day economists as smart as they aren't simply do not get it....Nor did they foresee the current financial calamity....
Furthermore the govt. is of the view that all it has to do is to print money....whereas if this were the case....there would not be a single poor country on earth....
Another govt. view is the answer is to fall further into debt....whereas this is likea credit card holder who pays his debts with an increase in their credit line.....does not work....
..........................................
Here is my challenge to any politician or economist who may read ZH....
The US needs to replant its orchard....and in the shortest time possible....
It must position itself to compete head on with those countries to whom it has lost manufacturing ....and those countries whereby it buys its energy....
To replace manufacturing which requires innovation.....the US must restructure taxes.....The current govt. wants to incrase taxes and reallocate through govt. means....This method is the most ineffective and inefficient method which mostly provides non-sustainable flows....This is akin to a friend stepping in and paying your rent for one month....but then leaves....
The govt. must make available the most efficient system of distribution possible by changing the tax structure to a 15% consumption tax....Under this scenario there is no corporate or individual taxes.....The tax revenue to be divided between the states and the Fed is collected as a consumption tax on all tangible items purchased and consumed....Absolutely no other taxes....
Also to increase the leverage of this money flow....the US must provide for a far better and more efficient worldwide securities exchange that is structured ideally for RETAIL....Transaction costs must be minimal ...ie 20 cents per 100 units.....and information must be fact based....wiki format...to replace the rating agencies.....
Again....I challenge any politician or economist....to review the competitiveness of BRIC and their tax structures ....and also debate the proper structure for US taxation with regards to created a a fast rising sustainable solution....
There is no better solution to more quickly rebuild the US economy....
And remember this....non-sustainable solutions are just added costs....not assets....At the moment only additional costs are being produced by the Fed....
Banking Sector = Job Creation? NOT!
Your post could have been a lot shorter.