Volcker wise in urging a firewall between banks, derivatives trade

The seemingly endless health care debate remains intensely partisan and now dominates news coverage of Washington, but there are other games in town. Among the most important is the largely neglected, low-profile but potentially profound effort of Paul Volcker, chairman of President Barack Obama's Economic Recovery Advisory Board, to reform regulation of our banking system.

This inattention is unfortunate, for while wrangling over how to address escalating medical costs engenders political apoplexy and heartburn, Volcker's financial remedy could provide soothing relief to our fevered system.

The plan, dubbed "Volcker's 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 some direct investments for clients and in defined forms of hedging.

The initiative was intended to be inserted into more comprehensive consumer protection and financial reform legislation now being considered in Congress. Initial reception has been lukewarm, not surprising given the power of financial lobbies. Senate Banking Committee Chairman Christopher Dodd opposes immediate full implementation, but editorial commentary that the measure may be dead is premature.

During the Great Depression, the pathbreaking Glass-Steagall Act accomplished what Volcker now proposes. The New Deal reforms also secured individual savers by establishing the Federal Deposit Insurance Corporation (FDIC). A strong regulatory hand was extremely popular in that desperate time.

In 1999, President Bill Clinton and Federal Reserve Board Chairman Alan Greenspan presided over congressional repeal of Glass-Steagall, setting the stage for the devastating excesses of this past decade.

Observers following Volcker's initiative tend to be pessimistic about success, but this may be a misreading. Addressing escalating medical costs is recognized as a very major national challenge. A stable financial system is a necessary condition to reliable public policies in this sector, as in others.

That is one ace in the political hand Volcker holds. There are others, including strong public support for re-regulation, which could overcome the very powerful banking lobbies. For example, a recent poll of members of the Chartered Financial Analysts Institute shows 68 percent support the measure.