Volcker Rule

Paul Volcker, super-tall dude and ex-Federal Reserve Chairman, came up with a rule after the 2008 financial crisis. And no, he wasn’t the Fed Chair at this time, that was Bennie Boy...but people still listen to what he says, namely because he was able to wrangle in inflation during his reign like a seasoned economic cowboy. Oh, and he was chairman of the Economic Recovery Advisory Board from 2009 to 2011, heading the management of the crisis.

Anyway, the Volcker Rule refers to federal law that prohibits banks from investing their own money in risky, speculative investments, i.e. limiting what they can do with hedge funds (which is ironic because hedge funds are supposed to be way safer than the naked market), private equity funds, derivatives, futures, options, and more in order to protect consumers from risky bank business. The kind that led to the financial crisis.

Arguably, one of the causes of the 2008 financial crisis was the lack of regulation, including the repeal of the Glass-Steagall Act in 1999. That act separated commercial banking and investment banking, protecting consumers and businesses commercial dealings from the high-risk, high-reward wild west arena of investment banking. But it was axed. With Glass-Steagall out of the way, banks mixed commercial and investment banking, and engaged in risky investments, in addition to doing shady things, like mislabeling mortgage-backed securities as AAA when the mortgages inside were actually really risky.

The Volcker Rule is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the “we’re sorry we let this happen, here’s some legislation to fix it” Band-Aid for the nation that went into effect in 2014.

Currently, the Volcker Rule is under attack. Proposed edits have been called for by the Fed Chair under Trump; the for-a-minute Secretary Treasury Mnuchin also called for changes to Dodd-Frank, and specifically the Volcker Rule. As of this writing, it looks like edits are in the making.