Volcker Rules: A Literature Review

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In Sanders book he states that academics have identified a number of factors that set the stage of the mortgage market
“Financial innovation in the form of asset securitization… Imprudent business and risk management decisions based on the expectation of continued housing price appreciation Faulty assumptions in the model used by credit rating agencies… Gaps and weaknesses in regulatory oversight… Government policies to increase home ownership … lending to higher-risk borrowers… economic conditions, characterized by accommodative monetary policies, ample liquidity…credit and low interest rates”12). According to Peter J. Wallison the 2008 financial crisis didn’t happen because of a lack of regulation but because of government policies. Policies
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The act named after Paul Volcker, who was the Chair of the Federal Reserve in the 1980s. Basically the act said that banks are prohibited from getting involved with hedge funds or private equity firms because those businesses have too much risk. Essentially the act denies banks access to certain revenues to raise money that is deemed to high risk. It is argued that with less employees making revenue and small banks being prohibited from making revenue through high risk means than small banks cannot finance small business or start-up companies which the majority of our economic growth comes from hence Dodd Frank caused a slow economic recovery. However, there is no evidence to support that small banks are still having difficulty. See chart B: employment at start-up companies has fallen. There may be a correlation to the Dodd Frank Act but there could be other reasons for the lack of new employment. There is still no definitive numbers to show that Dodd Frank is the …show more content…
The 2009 recession was the most severe since the 1930’s Great Depression. The 2009 recession was preceded by a banking crisis and there hadn’t been something similar since the 1930s. Economist have researched recessions and they have discovered that recessions involving a financial crisis tend to be longer and the 2009 recession was longer than other recessions in modern times. Researchers have also noted that financial crises effect the household and firm spending making the recession worse than they should be. The effects of Dodd Frank and its compliance cost and regulation did little to effect the economic recovery of the US. Given the interconnectedness of the banking industry in 2007 and how one failed bank can cause a domino effect on the industry. Given the fact that the 2008 financial crisis cause a credit crunch so sever the public lost confidence in banks and the government there is a correlation between lack of confidence and a slow recovery. And if it wasn’t for the Dodd Franks Act requiring accountability and transparency the consumer would never fully trust the banking industry. Given the fact we spent 9 trillion dollars on monetary and fiscal policy actions as well as bailouts to help the economy recovery it is, very slowly.[

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