Lewitt lambasts toxic financial products, calls Volcker plan weak

Moreover, just as with the tax on banks, the Volcker Plan misses the point, which should be to legislate the financial products that cause damage, such as naked credit default swaps. Moreover, this legislation promotes the fantasy that something can actually be done to prevent firms from growing “too big to fail” when it is virtually impossible to do so without placing limits on such products. You could cut down to size the largest firms in the world, but if they are all still trading toxic products with each other and are thereby still interconnected, the system would still be at risk if one of them failed because the entire system would only be as strong as its weakest link. It is not a question of individual firms being “too big to fail”; products such as credit default swaps effectively turn the entire system into the equivalent of a single firm that is too big to fail! That is why the products must be regulated. The proper approach is to significantly strengthen capital requirements AND eliminate toxic products, as I argue in my forthcoming book, The Death of Capital (publication date early May 2010). There can be little quarrel with the argument promulgated by Paul Volcker that banks should not be trading with depositors’ funds, but that begs the question of the systemic risks they still pose by trading toxic products with their own capital.