Our country is running massive deficits, financed by foreign government purchases of Treasury instruments. It’s not clear how long we can keep finding buyers for our debt while paying virtually zero interest. This is especially so when the stock market is going up, presenting an attractive (at least in theory) return compared to government bonds. In a rising stock market, people are less apt to head for the safety of bonds. So, what’s a government to do? Devalue the stock market. Now that the stock market has gone up for long enough such that companies like Goldman Sachs and Bank of America have been able to recapitalize themselves via trading profits, now might be a good time to crash the market back down and drive up demand for government bonds. A great way to do that would be for somebody in the administration to propose legislation that would ban stock market investments by some of the largest investors in the stock market: commercial banks.
I’m not saying this is one of the intents behind the Volker rule, but it does work out quite well. I’ll also point out that the Volker rule imposes even more restrictions on bank trading than Glass-Steagall ever had. All in all, a very nice way to keep the stock market form overheating without having to raise interest rates, a perfect bit of finesse whereby borrowing costs stay down for the government without having to tighten credit and potentially derail whatever recovery we’ve got going here. While I’m obviously joking about a conspiracy theory, I do believe it’s true that a stock market drop may be necessary to containing borrowing costs for the government. Thus, they may not be so quick to try to take efforts to prop it up.