UPDATE 1-Volcker optimistic on outlook for reform

* Sees broad legislative support for proposal

* Fixing US economic ills could take 3 or 4 years

* US needs to think about new taxes as govt spending rises
(Adds Volcker comments on taxes)

By Roger McGrath

ST. LOUIS, May 3 (BestGrowthStock) – Paul Volcker, a special
adviser to President Barack Obama, said on Monday that
prospects for reform of the derivatives market are good,
despite attempts by some market participants to keep the more
profitable parts from being moved to clearinghouses and

Speaking at Washington University in St. Louis, Volcker
also said he believed there was broad legislative support for a
proposal he crafted that would prevent banks from engaging in
proprietary trading. The ban, dubbed the “Volcker rule,”
surprised financial markets when Obama proposed it in January.

These days, legislators are generally on board with the
idea, which also extends to barring investment banks and other
entities from holding banking licenses and getting access to
loans from the Federal Reserve, he said.

“Should commercial banking institutions engaged in
providing those essential services and within the ‘safety net’,
be permitted to engage in strictly proprietary and risky
activities – trading, hedge funds, and private equity funds?”
he said in a speech.

“Should the investment banks, the insurance companies, (or
for that matter the finance arms of industrial firms) retain
the banking license and access to the Fed provided in the heat
of crises? I think not. More importantly, President Obama and
the Administration have adopted that position. It now seems
well embedded in the legislation process.”

Volcker’s assessment of the outlook for financial reform
came as Senate lawmakers prepared to debate a sweeping bill
that would overhaul rules for Wall Street less than two years
after a credit crisis nearly sent the world’s biggest economy
into a second Depression.

Unprecedented government intervention averted that outcome,
but stronger regulation is needed to prevent future crises, he

“Of course, we want to limit regulation to those things
that make sense,” Volcker said. “But equally, we simply cannot
shy away from needed reforms simply because some particular
interests are offended or because they seem to violate economic

Volcker said he sees broad agreement that derivatives
settlement and clearing should be brought on to exchanges and
clearinghouses. Efforts to rein in the $450 trillion
derivatives market, where lack of transparency and regulation
were seen to have contributed to the crisis, is a centerpiece
of the regulatory reform efforts.

“My sense is that the reform of the derivatives market will
be largely successful,” he said. “The prospects are good for
passage of a reform bill along the lines in the approach set
out by the Senate Finance and Agriculture Committees,
paralleling in large measure the bill passed by the House last

For such reforms to be successful, international consensus
is important and, he said, achievable.

Volcker, who is credited with taming inflation as U.S.
central bank chief in the 1980s, also gave his view on the
economic recovery, which he said will be “a long slog.”

Fixing U.S. economic ills could be a matter of three or
four years, he told reporters after the speech.

And with government spending on the rise, the U.S. will
need to consider imposing new taxes, he said. Among options, he
said, are a carbon tax, an energy tax, and “that awful
value-added tax.”

The European-style of taxation, with levies imposed on
goods at each phase in their production, is controversial in
the U.S. Volcker said last week that he did not think the tax
was “on the political table” in the near future.
Investing Analysis

(Writing by Ann Saphir in Chicago, Editing by Chizu Nomiyama
& Kazunori Takada)

UPDATE 1-Volcker optimistic on outlook for reform