In a recent interview, Paul Volcker was asked

Has Wall Street always been trying to wiggle out of regulations?

His response highlights why financial systems dependent on regulations and related enforcement are prone to crashes.

Yes. It’s been a problem since I’ve been at the Federal Reserve, or more so when I was first involved in commercial banking where I was a bit involved in regulatory and other financial policies. And you could see very different attitudes in different banks. I don’t want to name names. Some banks kind of took the view “look if the Federal Reserve or the Congress said this is the rule, ok, we’ll adapt to it.” There is another group that said: “if that’s the rule, how can I get around it.”…

So regulators always have to be vigilant?

I’m afraid that’s right.

Even in the best of circumstances where regulators are enforcing the rules, there are always bankers that want to game the system.  These bankers are very skilled at finding and exploiting loopholes in the regulations.

They are also skilled at working with politicians.

Mr. Volcker was asked for his opinion on the current legislative effort to reform the financial system.

House Finance Services Committee Chairman Jeb Hensarling just put out his legislation to roll back the Dodd-Frank banking regulations and the Volcker rule.

Oh, that would be a bad idea. I don’t know it in detail, but he has a whole sweeping, different approach to banking regulation. It is worth looking at Dodd-Frank to see where it can be strengthened in places or made simpler. That would be very desirable. And some elements could get left out. But just beginning by dismissing Dodd-Frank, which fits pretty well into the international climate and regulation, would be a big mistake in my view.

His response is telling.

If you have read Transparency Games or followed this blog, you already know there is an internationally accepted, proven way to make Dodd-Frank much simpler and also strengthen it.  This could be done in every area of the Dodd-Frank Act that substitutes rules and regulatory enforcement for transparency and the market discipline it enables.

We could start with the Volcker Rule.  Even Mr. Volcker agrees it is far too complicated.

It could be simplified and strengthened if banks disclosed their exposure details at the end of each business day.  With this information, the market, which includes the regulators, could see if the banks were making proprietary bets and exert discipline to stop this activity.

Simple, effective and also consistent with the transparency based global financial system.

Finally, Mr. Volcker was asked about the difference between reform of the financial system after the Great Depression and after the Great Recession.

After the Great Depression, there was the Pecora Commission Report and it seemed like everyone agreed that changes needed to be made. Maybe there hasn’t been the same agreement after the financial crisis?

Look, I was in banking in 1952 and there was no question that the whole experience of depression and war instilled conservative practices in banks.

The Pecora Commission showed how bankers used opacity for personal gain.  Naturally, there was agreement the redesigned financial system had to be based on transparency so  bankers could never again engage in this type of behavior.

Fast forward to 2007 and we find the bankers had managed to reintroduce opacity into wide swathes of the global financial system by capturing the process by which the SEC sets disclosure regulations.  Just like in the 1920s, bankers had used opacity for personal gain.

Unlike the 1930s, Congress elected not to have a high profile Pecora-style commission that would unite everyone behind a legislative agenda to fix problems like Wall Street’s capture of the SEC.  Instead, it went with the low profile, partisan Financial Crisis Inquiry Commission.  Lo and behold, even the FCIC found how bankers used opacity for personal gain.  However, this wasn’t disclosed to the public until after the Dodd-Frank Act with all of its sound and fury had become the legislative response to the crisis.