Volcker Rule aims for fewer risks in the market

Federal Reserve Board Chairman Ben Bernanke testifies while Paul Volcker listens during a House Financial Services Committee hearing on Capitol Hill on March 17, 2010 in Washington, DC. The Volcker Rule is continuing to be debated today.

Adriene Hill: There's renewed debate today about the so-called "Volcker Rule." It's named after former Fed chairman Paul Volcker who helped write up the law with President Obama. It's part of the Dodd-Frank Wall Street reform passed two years ago. Basically, the Volcker Rule says banks should take fewer risks in the market. As you might guess, banks aren't fans and are registering their displeasure this week.

To help sort out the hows, whys and why-we-should-cares, we've got Marketplace's Heidi Moore now with us live. Good morning Heidi.

Heidi Moore: Good morning, Adriene.

Hill: So, help me understand the Volcker Rule.

Moore: It might be easier if you think of stocks and bonds like rugs, and think of the banks like rug merchants. So what is the job of a rug merchant? He buys rugs from the makers, and sells them to other people. But he also keeps some of the inventory for himself --  the rugs that he thinks will be valuable one day.

Banks are exactly like that. They buy and sell stocks for their clients, and then there's some stuff off to the side that they are holding onto -- that they think is the really good stuff. The Volcker Rule wants the banks to stop hoarding rugs, because sometimes, those rugs don't turn out to be really valuable. They turn out to be junk. And then, when the rug merchant -- or the bank -- has too many worthless rugs, the government tends to come in and as we know, bail them out.

Hill: So why do the banks hate this so much?

Moore: It's like in the Big Lebowski, they think the rug really ties the room together. Actually, the banks think they're really smart rug investors. Meanwhile, Mr. Volcker and the government are saying: you know what? Your history of rug investments for yourself isn't so hot. Stick to selling them.

Hill: Why are we hearing these objections now?

Moore: It's been a really long time coming, actually. The government is asking for comments and opinions on the Rule, which was drafted two or three years ago, but still, this is kind of a first draft. So the banks want to influence it before it becomes official.

Hill: Marketplace's Heidi Moore, Thanks!

Moore: Thank you.

About the author

Heidi N. Moore is The Guardian's U.S. finance and economics editor. She was formerly the New York bureau chief and Wall Street correspondent for Marketplace.

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