Today (4 May, 2017) in Washington, the House Financial Services Committee approved a bill dubbed the “Financial CHOICE act”, sponsored by Jeb Hensarling, R-Texas. In the bill is a directive to repeal a section of the Dodd-Frank Wall Street Reform and Consumer Protection Act dubbed the “Volcker Rule”. What this does is strips Americans of choice and sets the country back on the course of a more financially volatile future that puts middle class Americans on the hook for Wall Street speculation, whether they like it or not.
What is the Volcker Rule?
The Volcker Rule is a section of Dodd-Frank that prevents banks from investing their own capital, including deposits from customers. The bank is stopped from taking the money that you put into your checking account and taking risks with it by speculating on the market, where returns can be much more volatile than the traditional practice of commercial banks loaning that money in the form of mortgages, auto loans, and other personal loans that are safer assets.
Why is this legislation necessary?
Imagine you are taking your car in for an oil change at the local dealer. The employees, seeing how nice your car is, use it to enter themselves into a race. The payoff if they win is huge, but the employees then keep the winnings to themselves. In the event that your car is totaled mid-race, the car will be replaced at a later date with a car of equal value, and neither the employees or the dealership pays for it. They use tax dollars from the Federal Government to buy the new car.
When a bank takes the money from your checking and savings accounts and invests it into risky assets without your permission, they are doing the same thing. It is one thing to lend your car to a driver with the purpose of sharing in the winnings and the losses together. In this analogy, you would be knowingly giving your money to an investor whose purpose is to take risk and make as much money as possible on the market. When you put your money into a checking account, however, there should be an expectation that the bank does not take unnecessary risks with it.
If your deposits are FDIC insured, why is this an issue?
In the event that the bank makes a terrible judgement, goes insolvent, and collapses due to these risks, the FDIC is required by law to step in and replace the funds. People who had nothing to do with the situation in the first place are responsible for paying back the lost money out of their Federal Income Taxes. The Volcker rule is a necessary part of American legislation. It protects the middle class and makes sure that speculation is done with approval from the customer. Any FDIC insured institution should not take risks that need to be bailed out with taxpayer money. If you’d like to race my car, first, show me your credentials, if I approve, we can split the winnings. If we crash and burn, we shouldn’t be able to charge the taxpayers.