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The Obama administration’s best economic hope remains Paul Volcker.
As the current political brawl appears headed for resolution certainly the most interesting, and possibly most important, political campaign this season has been waged well under the radar of the establishment mass media and has created not a ripple in official Washington.
A lot rides on whether Paul Volcker, the paterfamilias of the American financial community, finally succeeds in achieving the serious influence he is wrongly believed to have within the inner circles of the Obama economic team. If he does succeed, there is an outside chance that the problematic financial regulation and reform legislation that the White House cobbled together this summer with the banking stooges of both parties in Congress could lead to a real reform. Real reform would permit both oversight and restraint of Wall Street adventurers while allowing innovation and risk their proper places in the capital markets of the world. Without such real reform by America, we can scarcely expect European and other marketplaces to return to probity on their own. That they might fail does not bear thinking about.
Volcker’s strategy this summer offers a fascinating illumination of the compelling thesis advanced by Angelo M. Codevilla in the July/August issue of The American Spectator: that our nation is divided and its polity threatened by a Ruling Class that disdains when it cannot ignore the opinions of the far larger population of the rest of us, which he calls the Country Class. For while, at this writing, Volcker can clearly be said to be of the Ruling Class, he has been used as a kind of stage prop by both President Obama and leading Democrats in Congress to lend respectability to a mare’s nest of financial market reforms passed this summer, which promises much but may result in little except confusion.
Considering what cynically shabby treatment he has received over the last two years from the Ruling Class of both parties — ranging downward from President Obama himself — Volcker could be excused if he washed his hands of the whole financial markets crisis and went somewhere his undeniable expertise and insights would be better received. In other words, almost anywhere but at either end of Pennsylvania Avenue, where the rescue of the American economy has taken on an odor reminiscent of the time a popular administration and a tame Congress decided to privatize the petroleum reserve known as Teapot Dome.
But what Volcker has done instead is launch a surgical lobbying campaign targeting the real rulers within the Ruling Class, the minuscule clan of contributors and organizers of big-dollar campaign funds (to both parties, of course) who thrive and reinforce their mutual superiority in the tiny enclave found between Manhattan’s Upper West Side and Battery Park below Wall Street. Win them and he has won Washington, it’s as simple as that.
VOLCKER LAUNCHED HIS pianissimo bid in the June 24 issue of the New York Review of Books, a 140,000-circulation periodical that mixes lengthy literary reviews with polemics on politics keyed to its Gothamite constituency. The article was starkly titled “The Time We Have Is Growing Short” and began with a general indictment of the occupants of the White House over the past five years as well as the Democratic-dominated Congress for not doing nearly enough to deal with the long-evident structural flaws in the American economy that popped the bubble and that now thwart recovery.
“Restoring our fiscal position, dealing with Social Security and health care obligations in a responsible way, sorting out a reasonable approach toward limiting carbon emissions, and producing domestic energy without unacceptable environmental risks all take time. We’d better get started,” he argued.
The article came out just two days before the Group of Twenty summit in Toronto, where President Obama was supposed to rally the finance ministers and central bankers of the larger economies into a concerted economic recovery effort. Without citing Mr. Obama by name, Volcker looked at the European leadership in particular and did not hold out much hope of the president fashioning a consensus policy.
“If we need any further illustration of the potential threats to our own economy from uncontrolled borrowing, we have only to look at the struggle to maintain the common European currency, to rebalance the European currency, and to sustain the political cohesion of Europe. Amounts approaching a trillion dollars have been marshaled from national and international resources to deal with those challenges. Financing can buy time, but not indefinite time. The underlying hard fiscal and economic adjustments are necessary,” he said.
But in case it appeared he was giving the president a pass, he then recounted the shopping list of campaign issues Mr. Obama had stressed as the essential parts of the promised “CHANGE” that were left in default in the struggle to construct the Rube Goldberg health care monument to imperial government.
“As we look to the European experience, let’s consider our own situation. We are not a small country highly vulnerable to speculative attack. In an uncertain world, our currency and credit are well established. But there are serious questions, most immediately about the sustainability of our commitment to growing entitlement programs. Looking only a little further ahead, there are even larger questions of critical importance for those of less advanced age than I. The need to achieve a consensus for effective action against global warming, for energy independence, and for protecting the environment is not going to go away. Are we really prepared to meet those problems, and the related fiscal implications? If not, today’s concerns may soon become tomorrow’s existential crises,” he concluded.
As an opening bid to be taken seriously, the article accomplished its objective. It attracted no attention within the mainstream media and was almost surely not read at all by any member or staff of the House or Senate who might be tempted to game it for their own purposes. But for the elite focus group that does read the NYRB, it let them know that one of their most respected icons of financial expertise was alarmed at the intractable nature of the crisis and the president’s failure to act.
AT THE SAME MOMENT, Volcker was fighting what appeared to be a more winnable battle on a different salient of the policy front. He was on the verge of actually getting his way as Congress bickered during the final horse trades of what was advertised as the most significant reform of Wall Street and the financial markets since the Great Depression. It actually looked as if something called the Volcker Rule would be the centerpiece of that reform.
For weeks, the 83-year-old Volcker had been shuttling down from his offices in midtown Manhattan to prowl the congressional corridors where the financial reform legislation was undergoing competing drafts at the hands of lawmakers who had conflicting agendas about what was meaningful reform and what the Wall Street financial houses would hold still for.
To Volcker’s surprise, the Volcker Rule had suddenly taken on a political life of its own in these final days. At its simplest, what the former Fed chairman proposed was a return to a version of the barrier imposed by the Depression-era Glass-Steagall Act that drew a sharp line between commercial banks and investment banks. In Volcker’s version, commercial banks, such as Citigroup or your local bank, would take deposits and make loans to ordinary citizens and be accorded government support (such as FDIC deposit insurance) and, in the case of crisis, government bailouts. For that protection they would give up risky investments such as proprietary trading and operating hedge funds. The purely investment banks, such as Goldman Sachs, would be free to invest their own funds on whatever financial products they fancied, but if they ran the risks they could not expect any rescue from Washington that involved bailouts with taxpayer funds.
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