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June 27, 2017

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Lawmakers should move to implement the Volcker Rule

The seemingly endless debate over health care reform remains highly public as well as partisan, but the less visible struggle over banking regulation may prove more important to the economic health of the United States.

After surviving the global financial collapse, JPMorgan Chase is now sparking public alarm with enormous trading losses. Starting in 1929 and through the 1930s, the failures of the U.S. commercial banking system, along with Wall Street's collapse, fostered the worldwide depression.

Paul Volcker promotes fundamental financial reform. He recently retired as Chairman of the Obama administration's Economic Recovery Advisory Board, but remains active in policy debates. Full implementation of Volcker's remedies would provide relief to our fevered financial system.

Proposals dubbed "The Volcker Rule" would return the United States to strict separation between commercial banking and the risky activities involving trade in complex financial derivatives. Some exceptions are granted, including direct client investments and defined forms of hedging.

Initial congressional reception was lukewarm, not surprising given the power of financial lobbies. Senate Banking Committee Chairman Christopher Dodd, a Democrat, opposed immediate full implementation. However, editorial commentary that the measure was dead on arrival proved premature.

A limited version of Volcker's regulatory reforms was incorporated in the comprehensive Dodd-Frank financial reform legislation. Chase is now accused of going beyond permissible hedging. Federal regulators will begin implementation in July. Reflecting the complexity of the issues, a report on the new law regulators released last October totaled 298 pages.

During the Great Depression, the Glass-Steagall Act separated commercial and investment banking. New Deal reforms also secured individual savers by establishing the Federal Deposit Insurance Corporation (FDIC). A strong regulatory hand was extremely popular.

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