- - Sunday, December 15, 2013

The usual suspects were positively giddy last week after five federal agencies got together to adopt what’s known as the Volcker rule. This somewhat obscure, thousand-page regulation isn’t the sort of thing to come up in casual conversation around the water cooler (except on Wall Street). But it’s another example of the bad ideas making America less competitive.

The sprawling rule sprouted from a single line in the Dodd-Frank regulatory bill. The rule enhances the power of the Federal Reserve to crack down on banks that engage in “proprietary trading,” which means that a bank can’t make investments with its money if a bureaucrat decides the investment doesn’t “benefit the consumer.” This is supposed to prevent banks from gambling on risky propositions. The government always thinks it knows best how to spend other people’s money.

Commissioner Daniel Gallagher of the Securities and Exchange Commission noted in his dissent that the rule will have the opposite of its intended effect, increasing risks for banks and decreasing liquidity. Under the rule, banks can continue to buy and sell in a way that creates a market, and they can continue hedging activities that reduce the risk of transactions. They’re just going to be less effective at doing it, which means they will take more losses.

No economic analysis of the likely impact was done before the sweeping change was imposed. A banker will have to read between the lines of the vague and arbitrary language, and keep looking over his shoulder, wondering whether a Monday-morning referee at the Federal Reserve calls a foul. Banks will inevitably take a pass on promising opportunities to avoid offending Washington.

Banks too big to fail won’t have trouble evading the requirements because a loophole allows the use of foreign subsidiaries to evade the restrictions. The smaller banks, with fewer funds to devote to compliance efforts, will struggle.

The Fed must be made less powerful, not more powerful. This unaccountable body already has too much influence over the economy. Instead of cracking down on small banks, Congress ought to turn its attention to the really big bank on Constitution Avenue that has had its foot on the neck of the economy for the past five years.