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Vanguard's Bogle on the 'Volcker Rule' Reforms

John Bogle, founder of the Vanguard Group, joined us again today. He took on Wall Street and endorsed the “Volcker Rule” reforms put forward by President Obama, based on the proposals of White House advisor and former Federal Reserve Chairman Paul Volcker.

Asked about the proposed reforms, which would re-draw the line between commerical and investment banking, Bogle had this to say:

JOHN BOGLE: It seems to me like the right thing to do. Largely because we’ve developed a system of enormous complexity, where people don’t understand the risks, where the banks and the bank holding companies…have gotten into all sorts of activities that have nothing to do with taking deposits and paying interest on them, lending the money out usually long and paying interest on these short term liabilities.

And that system worked pretty well for a long time. But we are – to state the very, very obvious – a long, long way from what we saw in “It’s a Wonderful Life” with Jimmy Stewart, that little savings and loan out there in Peoria or wherever it was. And that complexity has been very expensive, and in fact very expensive to the banks themselves. The market capital of all of our banks was probably in round numbers, the total value of their equity – common stock in the marketplace – around two and half trillion dollars only a few years ago. And it’s probably under $500 billion today. So these bank executives have cost their shareholders, if you will, $2 trillion. And yet they still get these huge bonuses. That’s a little different issue. But it just shows how badly this system is working. So we’ve got to do something, and I think the Volcker plan is a good start.

Steve Bartlett, who represents a financial services trade group, also appeared on the show today and said there’s no going back to “It’s a Wonderful Life”-style banking. He pushed back against the idea of reinstituting walls between different kinds of banking. Those walls had been in place until 2000, when the Glass-Steagall Act was repealed, and deposit-taking banks started operating in different, riskier, ways.

STEVE BARTLETT: …The difficulty with the so-called Glass-Steagal is that it was a concept to try to separate into fifty or sixty different categories of how to offer financial services. So you have a credit card is separate from a checking account, is separate from an insurance coverage, is separate from a 529, is separate from a mutual fund. And frankly, that whole system had simply broken down by demand of the customers, who wanted financial services and still do. Now, they do want those financial services to be offered in a safe way, with better regulation. And a lot of that regulatory structure broke down and it needs to be rebuilt in a much better way. But restoring back to “It’s a Wonderful Life” is just simply not feasible and would do a lot of harm.

TOM ASHBROOK: John Bogle, simplicity’s too much to hope for?

JOHN BOGLE: No, I don’t think it’s too much to hope for. I mean, we’re in a complex world. I’m the first one to say that. But investors have to wake up to the fact that all this complexity has produced virtually nothing but losses for them.

You can listen to the full Bogle-Bartlett exchange today. On Point has looked closely at these issues before. A recent hour with MIT’s Simon Johnson is worth a listen.

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  • david

    It may be a good idea to apply some brakes on these companies during this period of hard times. Must do so in a way that does not discourage healthy growth. We have already seen reaction from these companies turn toward the negative due to harsh comments made. We need to stop demonizing the rich, the banks, corporations and Wall street or we will begin to sound alot like Hugo, the rich are the problem and Govt. is the solution. There is enough blame to go around.

  • ulTRAX

    Gee David, since you reposted here to the Obama vs The Banks forum… I should repost my response to you from 1-28:

    David: We need to stop demonizing the rich, the banks, corporations and Wall street or we will begin to sound alot like Hugo, the rich are the problem and Govt. is the solution. There is enough blame to go around.

    Sure… the those in government who passed irresponsible bills that repealed Glass Steagall and lifted many restrictions on commodity trading set the stage for the economic collapse. We can thank Republican Phil Gramm for pushing both of those pieces of legislation. And we can see why banks wanted these restrictions lifted. The easiest way to make big money in our economy is NOT by doing something innovative or productive, but to skim off the churn of other people’s money doing speculative trading… better yet, creating bubbles and getting out early leaving others to hold the bag.

    Regardless of the foolish lifting of restrictions by government, it was THE BANKS who took advantage of this new freedom and went insane speculating wildly with borrowed money. It was the likes of Goldman Sachs who pumped up the price of oil to $147 a barrel. With gas hitting $4.50 a gallon they had a vacuum cleaner in ALL of our wallets. It was probably the last nail in the coffin for our economy.

    THESE BANKS BROUGHT THE ECONOMY DOWN… and yet while they have left in their wake a destroyed economy with millions out of work and losing their homes… and got billions in bailouts, they believe they still deserve bonuses! WHAT ARROGANCE!!!

    YES!!! We SHOULD demonize these banks. We should break them up, impose strict regulations on ALL speculative trading, tax such transactions, and create a banking system that is there to fund loans for mortgages etc… and to foster innovation and responsible growth.

  • cathy

    David,

    No one is talking about demonizing all of the rich. There are many responsible wealthy people who did not contribute to this mess. However, when there is an epic catastrophe of these proportions, it is totally irresponsible to not try to figure out what happened and who is reponsible.

    Those who were responsible should be made to pay in some way. They have done nothing so far. To the contrary, they continue to rake in enormous bonuses.

    Moral hazard appears to mean nothing to you or to them. However, for the good of our economy and our country, something must be done and many people should be held responsible.

  • Cathy

    David,

    Just looked at your post again. Saying that there is enough blame to go around is another way of saying that no one should be held responsible. To the contrary many, many people in this country did nothing to bring on this crisis other than to trust that those of wealth and power knew what they were doing. Now we all know better.

    Cathy

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