Drop, Don’t Flip, The Presumption
March 4, 2012 Leave a comment
Economics of Contempt suggests that the way to reform the Volcker Rule, if done right anyway, is to flip the presumption. Namely, instead of (as in the current proposed framework) assuming all trades are ‘prop trades’ unless demonstrated to be in one of the exemptions, presume trades are market-making/hedging-related exemptions unless shown to be ‘prop’.
That may indeed be an improvement. An even better and simpler improvement, however, would be to drop the presumption. What presumption? The presumption that ‘prop trading’, as such, exists. It doesn’t. All these people gung ho about banning ‘prop trading’ have bought into a mythology about how trades can be cleanly separated into ‘prop’ or the other kind. That is the root of the problem, that’s why issues of the ‘presumption’ arise, and there is no way around it. Everyone has become infatuated with banning a nonexistent thing that can’t be defined.
There is no such thing as ‘prop trading’, unless you think all of banking is prop trading. Any ‘line’ the regulators attempt to draw – regardless of which direction their ‘presumption’ leans – is arbitrary arbitrary ARBITRARY. And I’m not going to stop saying this just because literally everyone else in the entire world – and our master Paul Volcker – disagree.