After years of delays, changes and significant debate, the Volcker Rule is now, largely, in full effect. Sold to a sometimes intellectually incurious Congress and the electorate as a central piece of legislation to limit systemic risks to the financial system, the Volcker Rule, among other things, prohibits “banking entities” from engaging in proprietary trading activities and acquiring or retaining “ownership interests” in (or acting as sponsors of) certain “covered funds.”

Most financial institutions subject to the Rule have been prepping for this day for a long time. Let’s take the two big prongs of the Volcker Rule one by one. First, there’s a question of holding interests in vehicles which may be covered funds. How hard could that be to figure out? Everyone knows what our wise and thoughtful elective leaders were thinking about hedge funds and private equity funds when they ginned up this notion of “covered funds.” Invest depositors’ hard-earned money and the guaranty of the federal government on such dodgy, shady investments? No way!

But putting aside questions of the wisdom of the underlying catechism of Volcker, it has turned out to not be so easy to figure out what is and what is not a covered fund. What? Well, first, this means that massive amounts of managerial time and legal costs have been incurred in trying to sort out what is and what is not a covered fund. Money well spent? Hardly the sort of investment that grows the economy. Second, in this regulatory environment, the word is: When in doubt, get out. This Rule has had a chilling impact on a number of investments traditionally made by our banks that most would say make perfectly good sense and is not the equivalent of a night at the tables in Monaco, which was the behavior Volcker Rule was intended to end.

Now, let’s think about the prohibition against proprietary trading. The same sort of notion that was the underpinned the covered funds rule. Banks should not be making high risk, high return bets with the depositor’s money. The Volcker acolytes, being reasonable chaps, allowed market making and hedging activity to continue while prohibiting proprietary trading. Want to bet how easy it is to distinguish one from the other? The Rule is larded with ambiguous, nuisance definitional distinctions, extensive documentation and compliance requirements. Any market making must be such that it is “designed not to exceed the reasonably expected near-term demands of clients, customers or counterparties.” That’s crystal clear, right? At least with the prohibition against investing in covered funds, you can get out and stay out. But the market making and hedging activities rules require the banks to continue to make these fine distinctions between proprietary trading and core market making every single day; the regulatory gift that keeps giving.

Now finally, let’s talk liquidity. A rule that births so much second guessing, delay, hand wringing and pointless, endless process will materially suppress liquidity. And that’s what’s happening. Liquidity is essential; it is the oil of the machinery of commerce and finance. Liquidity prevents small mistakes from becoming large ones. What price this loss of liquidity? Realization about loss of liquidity has just begun to dawn on some regulators and many in Congress. Perhaps, a tad too late.

So, where are we? We’ve caused our banking market to spend a bucket of money; we’ve impaired liquidity and created a bias against bank investment in all sorts of vehicles including securitization vehicles which are critical for the efficient operation of the market place. Couldn’t we have gotten to a rational regime regarding proprietary trading and investment in so-called private equity and hedge funds through rigorous and principled enforcement of existing safety and soundness regulations? I think it’s obvious that we could have. But why do that when we can build an entirely new regulatory regime with its own governmental cost center? The regulatory state seems to exist only to metastasize and grow.

But enough whining; it’s here, it’s not going away (at least any time soon) and we need to deal with it. And deal with it we can and will. Our market remains entrepreneurial, flexible, adaptive and smart. We will figure this out. By the by government: Be careful what you wish for. The markets’ phylogenetic response to Volcker (think shadow banking) may not take it to places you find so terribly amenable. That’s the pesky problem of unintended consequences of ill thought through rule making. A lesson never learned.