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September 25, 2009 (LPAC)—During his testimony to the House Financial Services Committee on Thursday, former Federal Reserve chairman and senior economist Paul Volcker repeatedly and strongly disagreed with the "bank regulation reform" policy of the Obama White House and Treasury Secretary Timothy Geithner. Volcker is chairman of the outside Economic Recovery Advisory Board created, and then largely ignored, by Obama in favor of Geithner, Lawrence Summers, Peter Orszag, et al.

The focus of Volcker's testimony was that government draw a strong line between commercial banking—which "is and always has been under a government safety net" of liquidity borrowing, deposit insurance, reorganization authority, etc.—and financial "non-banks," including investment banks, AIGs, and so forth, which should be kept outside that safety net. This was the general principle which underlay the 1933 Glass-Steagall Act, eroded and then repealed in the 1990s on initiative of economists like Summers who represented unbridled Wall Street speculation.

Volcker said, "I particularly welcome the strong reaffirmation of one long-standing principle—the separation of banking from commerce—that has long characterized the American approach toward financial regulation. In practice, over a number of years that approach has been eroded.... As emergency measures, further exceptions to the rule were accepted in the face of the severe crisis. Failure to close those existing loopholes will inevitably weaken needed prudential safeguards and raise difficult questions about the extent of moral hazard, an issue that looms very large in the light of events of the past year. It is those events—including particularly the rescue of money market mutual funds and the decisions to broaden direct access by non-banks to Federal Reserve credit facilities—that point to the need for strong enforcement of the distinction between banks and other financial or commercial institutions."

On Sept. 23, testifying to the same committee, Geithner said the Obama Administration believes the TARP and similar bank bailout programs need to be extended and may need to be used further. And he presented again the White House's proposed "new financial regulatory authorities" which would, among other things, single out the largest, riskiest "too-big-to-fail" financial institutions by imposing higher capital requirements on them. Geithner admitted that although Treasury would not "publish a too-big-to-fail list," the effect would be the same, because Wall Street could easily figure out what institutions were on it.

Volcker today emphasized several times that this White House strategy is wrong. Although generally characterizing everything done by the Federal Reserve during this financial breakdown as unavoidable, Volcker said that the primary aim of regulatory policy now was not to do such things again, for investment banks, insurance companies, money-market funds and "impersonal capital market operators" like hedge funds, etc. And he heaped criticism on Geithner's "effective list" of too-big-to-fail.

Economist Lyndon LaRouche has described Geithner as hopelessly incompetent, and said again today said he "should be fired," and the Glass-Steagall principles put through in a bankruptcy reorganization of the banking and financial system.