LIKE LEG warmers and mullets, the Volcker rule sounded like a great idea to someone at the time. It couldn’t have found a better namesake than Paul Volcker. In the wake of the 2008 financial crisis, the cigar-chomping former Fed chairman reemerged with his 6-foot, 7-inch frame and gruff voice, sounding as though he might grab a few banks by the neck and start banging heads like Moe Howard in a Three Stooges movie. Instead, he called loudly for a prohibition on proprietary trading by US banks - in-house operations that trade everything from stocks and bonds to gold, oil, and futures.
The Volcker rule, which is meant to keep banks from jeopardizing depositors’ money with risky trades, was written into the Dodd-Frank banking-reform law. Lately, however, the rule has come under heavy fire. Not by angry bankers, but by government regulators and central-bank officials around the world. These aren’t the type of bureaucrats who are afraid of big government. Instead, they’re afraid of unintended consequences - the possibility that the new regulations will limit the markets for government bonds, which today are often purchased by big banks’ in-house trading desks, and will thereby raise borrowing costs around the globe. Maybe they’re wrong. But with final rules scheduled for July, and with the euro hanging in the balance of an “orderly’’ Greek default, we’ve picked a dangerous time to find out.