True to form, the White House set forth a sketchy program to limit the proprietary trading activities of banks, and it is a vote for the status quo which is being tarted up as something else. I'm amazed that someone of Volcker's stature is allowing himself to serve as the branding for ideas that are sound on a high-concept level, but are being gutted in implementation.

The press reports have been suitably vague, but two ideas appear to be central, and they were confirmed by a press background briefing that a kind correspondent sent me. They serve to neuter this supposed reform (I am beginning to think we need to ban the use of the word "reform"; Team Obama has absconded with it. For them "reform" = "anything we do here that sounds important enough that a Cabinet member could talk about it for five minutes". If they keep this up long enough, which they seem determined to do, the term will be utterly useless.)

You can drive a supertanker though the loopholes in this proposal, which are:

1. If a firm does not own a bank, it can do proprietary trading

2. Trades with customers are not proprietary trades

These are so silly that I'm astonished anyone is treating this proposal seriously.

Let's dispatch them in order.

Whoever thinks that proprietary trading is just swell as long as the firm does not own a bank (meaning the kind that takes deposits) must have slept through the entire credit crisis (note I am not saying prop trading cause the crisis, but I guarantee there will still be reader who demonstrate in comments that reading comprehension is not one of their strong suits).

The implicit idea is that government backstops extend just to deposit-taking firms. That is patently ridiculous and is an attempt to hide from the public the reality of how the financial system works.

Thanks to thirty years of deregulation, a very large portion of credit intermediation (finance speak for the process of providing loans) has shifted from banks to the capital markets. As most readers know, many types of loans are originated by a bank, combined with other loans, turned into bonds, and sold to investors.

For reasons too long to go into now, bonds are traded over the counter (this is not a nefarious plot; there are legitimate reasons why). Over the counter markets have economies of…

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