I think the Volcker rule’s critics are missing something: the Volcker rule is designed to apply to a world where the shadow banking system has already declined. This really is just a reflection of the reality we face today: the commercial paper market has halved since mid-2007; asset backed commercial paper, a cornerstone of the shadow banking system, is just over one-third its mid-2007 peak; repo markets are still struggling to recover and there is no reason to believe that the repo of naturally illiquid (but AAA rated) assets will be permitted again any time over the next few decades; there isn’t much reason to believe that securitization will recover any time in the near future either.
In short, kudos should be given to our regulators for allowing market forces to take care of the shadow banking system, while doing extraordinary work to protect the core of our credit markets. They successfully let the air out of the bubble without killing the real economy.
The evidence of the crisis is clear: the only way for the shadow banking system to survive was for the government to stand ready to bear the costs of products that are simply not viable economically. And our regulators were smart enough to bail out the real economy, without actually saving the shadow banking system.
Now that “off-balance sheet” commitments of the commercial banks are going to have to be capitalized, there’s not much likelihood that the old shadow banking system will ever come back. The people who envision a rebirth of the shadow banking system claim that it “must” come back or the world as we know it will end. Well, folks, that was 2008.
The Volcker rule comes into play now that the hard work has been done. Volcker’s goal is to make sure that banks don’t just find another way to create an alternate banking system: that’s what his ban on “proprietary trading” is about. The future, not the past.