Until last week the Obama Presidency had been littered with a great deal of potential, but little success. The costly and futile conflicts in Iraq and Afghanistan continued unabated while the White House’s ostensible deference to Wall Street showed no change — largely thanks to the destructive efforts of Larry Summers, Tim Geithner and Ben Bernanke.  With the mooting of the Volcker Rule, it appears that finally the Obama Administration is taking the long-awaited stick to Wall Street.

While the Volcker Rule may never be implemented, and if it does, aggressive Wall Street lobbying of Congress will almost certainly gut many elements of the plan, it at least represents a small step forward for Main Street.

Volcker was the chairman of the US Federal Reserve between 1979 and 1987, largely under Ronald Reagan. Early in his tenure, Volker courageously lifted US interest rates to 20% to curb runaway inflation, which had risen to 13.5%. After serving on several bank advisory boards, and leading the investigation into the corrupt UN Oil for Food program in Iraq, Volcker was appointed to President Obama’s Economic Recovery Advisory Board in 2008.

Until last week, it was thought that Volcker’s role was largely ceremonial, taking a back seat to Treasury Secretary Geithner (and former Clinton Treasury Secretary Larry Susmmers). Geithner, who had directed the farcical TARP program (which handed taxpayer monies to banks, who then proceeded to use those monies to pay executive bonuses) preferred a far softer line on banks, requiring them merely to hold a larger amount of capital, but not demanding any curbs on risky behaviour.

Geithner’s attitudes may have stemmed from his background — his mentor was former Clinton Treasury Secretary (and Summers’ predecessor) Robert Rubin — the former Goldman Sachs veteran who was accused by the New York Times of being “an architect of [Citigroup’s] strategy … to chase profit by expanding in collateralised debt obligations and other risky products.” Citigroup received $US45 billion ($A49.9 billion) of the TARP money distributed by Geithner. Geithner also led the rescue of collapsed insurer AIG. That rescue, conducted with then Treasury Secretary Hank Paulson, led to Goldman Sachs receiving $US13 billion from taxpayers.

Another influence on Obama’s prior pro-Wall Street policies was Summers himself — the former Clinton Treasury Secretary, economist and Harvard President. While Treasury Secretary, Summers was a leading proponent of the Gramm-Leach-Biley Act of 1999, which repealed the Glass-Steagall Act and allowed commercial banks to provide investment banking services. It could have also been called the Too Big Too Fail Act, because that was its major effect (The Gramm of Gramm-Leach-Biley Act was a gentleman by the name of Phil Gramm, described as the “high priest of deregulation” and accused of being second only to Alan Greenspan in causing the recent economic crisis. Gramm was also largely responsible for the Commodity Futures Modernization Act of 2000, which freed derivatives from regulation. That Act happened to benefit a company called Enron. Coincidentally, Gramm’s wife, Wendy, was a director of Enron).

Dismantling Glass-Steagall was blamed by many as a reason for the excessive risk taking by financial institutions, namely Citigroup (which survives today courtesy of a $US45 billion bailout and a $US300 billion guarantee). In his book, The Roaring Nineties, Nobel Prize winner Joseph Stiglitz noted:

The Glass-Steagall Act of 1933 addressed a very real problem. Investment banks push stocks, and if a company whose stock they have pushed needs cash, it becomes very tempting to make the loan. The US system worked in part because under Glass-Steagall the banks provided a source of independent judgments on the creditworthiness of businesses. When a “full-service” bank makes most of its money by selling equities and bonds or arranging “deals,” issuing loans becomes almost ancillary — a sideline.

The events of last week shows that rumours of Volcker’s political death at the hands of Geithner and Summers were somewhat exaggerated. Contrary to Bloomberg reports last year that “Summers isn’t regularly inviting Volcker to White House meetings and hasn’t shown interest in collaborating on policy or sharing potential solutions to the economic crisis”, Volcker’s influence has finally come to the fore.

The proposed Volcker Rule, if implemented, will prevent banks from undertaking proprietary trading (which involves using their own balance sheet to make speculative bets in asset prices), as well as invest in or sponsor hedge funds or private equity businesses. While the private equity and hedge fund references appears somewhat strange (private equity especially is usually run by private firms rather than large banks, although some, such as Citigroup with its CVC subsidiary have private equity interests), the ban on proprietary trading is welcome and overdue.

(The world’s most profitable investment bank, Goldman Sachs, did not, however, appear overly concerned at the Volker Rule, with the Wall Street Journal reporting that the bank’s CFO, David Viniar, claimed that “walled off proprietary trading desk, in which employees are taking positions on behalf of the firm with no client involvement is a very, very small piece of what we do.” Amounting to only 10%  of Goldman’s revenues . Viniar noted that “the majority of what Goldman does is focused on helping clients’ hedge positions and that results in the firm taking risk … if the bank manages the principal risk well, it results in the firm making money.”)

While some, including this writer, would have preferred to see the plan go further, including a greater limit on the size and activities of banks, it is certainly an improvement on the pro-Wall Street policies furthered by the likes of Summers, Geithner and Paulson under the watchful eyes of highly paid Wall Street lobbyists.