Bank of America and Merrill Lynch would have to be separated and Goldman Sachs could no longer be a bank holding company. "Commercial banks would take deposits, manage the nation's payments system, make standard loans and even trade securities for their customers -- just not for themselves. The government, in return, would rescue banks that fail. On the other side of the wall, investment houses would be free to buy and sell securities for their own accounts, borrowing to leverage these trades and thus multiplying the profits, and the risks. Being separated from banks, the investment houses would no longer have access to federally insured deposits to finance this trading. If one failed, the government would supervise an orderly liquidation. None would be too big to fail -- a designation that could arise for a handful of institutions under the administration's proposal" (Uchitelle, "Volcker," 2009).
The Volcker proposal seems sensible, as depositors would be insulated from risk, be able to make standard loans and have their deposits insured. Commercial banks would have the confidence that they could make such loans to consumers with the support of the government. Investment firms could take larger risks, but only consumers with an appetite for such transactions would become involved in such firms. However, while the firms would be less closely regulated, they would also have less financial support from the government, should they fail (Uchitelle, "Volcker," 2009).
But the bank lobby is powerful in Washington, D.C. In 2006, banking lobbyists vigorously opposed seemingly sensible and moderate attempts to rein in the industry practices, including limitations on banks that held large commercial real estate properties. Regulators have been reluctant to curtail speculation during 'good times' and often do not vigorously enforce legislation 'on the books.' "Of the nation's 8,100 banks, about 2,200 -- ranging from community lenders in the Rust Belt to midsize regional players -- far exceed the risk thresholds that would ordinarily call for greater scrutiny from management and regulators" (Dash 2009, p.1). This suggests that further regulation, without a will to enforce it on the part of the government, may accomplish little.
A failure of political will seems endemic to the system. Just as government regulators did not take measures to limit the financial fallout from the housing bubble; they are...
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