Friday, March 30, 2012

MIT Prof. Rips Morgan Stanley-commissioned Report on Volcker Rule Costs to Energy Traders and the Economy

Thanks to a reader.
I've not yet read the study but may get to it this weekend.
Parsons is MIT's Executive Director, Center for Energy and Environmental Policy Research and Joint Program on the Science and Policy of Global Change  and a Senior Lecturer, Sloan School of Management.

From his Betting the Business blog:
The quickest way to a conclusion, … jump. 
Earlier today, the consulting firm IHS released a report decrying the horrible consequences that the Volcker Rule would have for the US energy industry and the economy.
It’s a hatchet job.
There are 2 essential fallacies at the heart of the IHS report. And many other ones, too, but let’s focus on the essential ones.
First, the report assumes its conclusion. The Volcker Rule bans banks from proprietary trading. But the Volcker Rule does not ban anyone else from proprietary trading. The IHS report assumes that when banks stop proprietary trading, no one else will step in and do so.
That’s a ridiculous assumption. Let’s look at other industries where governments sometimes regulate which institutions may and may not operate – take alcohol sales, for example. Suppose a state were to ban grocery stores from selling alcohol. Does that mean alcohol would not be sold? Obviously not.
So why does IHS assume that if bankers stop providing this service, no one else would step in to do so. The report never explains.
It’s a long, bloated report. But only after 91 pages (electronic count)… in the conclusion no less … do the authors get around to addressing the critical assumption. When they do, all they can say is:
U.S. banks’ deep knowledge of the complexity of energy and financial markets cannot be replaced quickly.
Quickly? So now, the issue is quickly? So finally, at the end, the authors tell us that the real issue is just the speed of implementation. Does IHS mean that the Volcker Rule would be a good idea, but we must implement it slowly, so as to give new businesses time to step into the breach? Certainly the Executive Summary does not seem in line with that nuance in the conclusion....MORE (and meaner)