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The Obama administration’s best economic hope remains Paul Volcker.
(Page 2 of 3)
That one version or another of the Volcker Rule restraints was part of most of the competing drafts must have been a sweet satisfaction to its author, considering the early opposition that had greeted it by such Ruling Class advisers to President Obama as chief economic adviser Larry Summers and Treasury Secretary Timothy Geithner. Both men made it no secret they considered the former Federal Reserve chairman to be a dinosaur. It irritated them that he had dismissed their headlong rush to pump hundreds of billions of dollars into the reserves of the major financial houses at the height of the crisis. Volcker had argued against pumping capital into banks that would use it to fluff up their balance sheets; instead he called for a new Reconstruction Finance Corporation, the Depression-era agency that loaned funds directly to small- and medium-sized businesses.
That Volcker had his nose inside the White House tent in the first place had annoyed many Obama aides, until they realized that the president was an even more cynical and adroit gamer than they. In the rush to appear to be responding with decisiveness as markets crashed and credit vanished in November 2008, President-elect Obama announced he would create a President’s Economic Recovery Advisory Board “of non-governmental experts from business, labor, academia and elsewhere” to help him plan the broad strategy of recovery, including reform of the financial marketplace. Volcker, the man credited with halting the inflationary catastrophe of the 1980s, would be the PERAB chairman, and Austan Goolsbee, the campaign’s economic adviser, would be its director. Goolsbee has since been shifted over to the Council of Economic Advisers.
The appointments drew universal praise, especially when the incoming administration compared the new commission with the influential President’s Foreign Intelligence Advisory Board, which has had a real place in the policy structure used by presidents dating back to the Eisenhower era.
Yet the board itself, once it was appointed in February 2009, turned out to be something of a yawn. There were names from past eras such as Clinton adviser Laura Tyson, Reagan economist Martin Feldstein, and Richard Trumka, head of the AFL-CIO. But the 11 other names hardly are creative economic policy innovators. Worse, something Washingtonians are always vigilantly aware of, the PERAB was denied “quarters and rations,” its own office and staff. The board’s affairs were to be managed by a Treasury undersecretary and most of its subsequent meetings have been conducted by telephone conference calls.
Such statements of advice from the group which the White House has seen fit to make public focus on improving retirement accounts and increasing the personal savings rate. Financial reform advice has been confined to one four-page white paper sent last year to the congressional committees that did call for a version of the Volcker Rule. But for all of 2009 none of the administration’s versions of what it wanted to do with Wall Street contained so much as a mention of reviving any form of Glass-Steagall.
NOT THAT PRESIDENT OBAMA has been immune to the need to demonstrate that he was as serious about reforming Wall Street’s evil ways as either of the two congressional powers overseeing the reform legislation, Rep. Barney Frank (D-MA) and Sen. Chris Dodd (D-CT). Both chair their respective chamber’s financial affairs committees and both have been eager to use Wall Street’s excesses as cover for the fact that they were largely responsible for more than a decade of bubble-inflating mandates such as forcing both quasi-government mortgage underwriters Fannie Mae and Freddie Mac to lure low-income earners into home purchases with debt burdens they could ill afford to carry.
But to underscore his own commitment, the president on several occasions would march a cooperative Volcker into the White House press room where he would stand, looming over the chief executive with a sheepish grin, while Obama promised one dramatic sham or another. At one such bit of performance theater in January of this year Obama suddenly signaled a change of mind.
With Volcker again serving as an ill-at-ease backdrop, the president told the press corps that he wholeheartedly urged Congress to pass “simple and common sense reform, which we’re calling the Volcker Rule-after this tall guy behind me.” One would have thought that should have been enough to ensure the adoption of Volcker’s reforms, but as so often happens in Washington, one would be wrong.
Even after both Dodd and Frank had reluctantly included the reforms in their committee versions and even after Volcker had himself compromised by agreeing to allow commercial banks to invest up to 3 percent of their capital (up to a fixed dollar amount) in hedge funds and private equity fund products, the deal was hardly done. It now appears that even into the final hours of June 23 and 24 Volcker was assured by both Dodd and Frank that all was well and he could stay in New York.
But when the bill was finally unveiled on June 25, the dollar limit was missing and the definition of what constitutes bank capital (for the limit’s test) was watered down to effectively give banks a 40 percent boost in what assets they could put into high-risk investments and still claim taxpayer protection. The rest of the 2,400-page document is a dog’s breakfast of vaguely worded new protections that have no funding dedicated and new powers for the White House to bail out whomever they please among their Wall Street patrons. While it calls for a massive increase in Washington supervision of the financial markets, the bill is mute on the duties the proposed super-agency will be assigned or what specific actions will be scrutinized.
Volcker’s response to this deliberate flimflam was measured but unmistakable. After a week of silence he issued a public statement that “We could have done better. The ban on proprietary trading is still there. But I’m sorry we lost the tighter limitations on hedge funds and private equity. I’m a little pained that it doesn’t have the purity I was searching for.”
TWO WEEKS LATER Volcker made his disappointment crystal clear. The New York Times, which has of late become increasingly restive at Mr. Obama’s failures of omission, devoted two full pages of its Sunday Business section to a carefully worded interview that pointed out the shortcomings and contradictions in the final legislation, accompanied by a four-column color portrait of Mr. Volcker on the cover and an equally flattering photograph of him together with his recent wife, Anke Dening. Missing was any sense of betrayal. The closest the article came to any criticism of anyone was a bland statement that “Mr. Volcker has had a lukewarm relationship with the Obama White House, where the approach to the economy and financial regulation has been dominated by… Geithner… and Summers.…” Well, yes.
But two weeks after the Times piece appeared he made his even sharper complaints, this time in of all places a softball interview with the New Yorker. Even though the magazine boasts a 1.4 million circulation that reaches nationwide, its main focus and its target audience remains what its title declares. The Ruling Class’s better thinkers were left in no doubt that both the White House and the Democratic congressional leaders had used Volcker’s iconic status and reputation in a shabby fashion. Or that Volcker has little faith that what is now called “The Dodd-Frank Wall Street Reform and Consumer Protection Act” will restrain neither a Gadarene Wall Street from rushing over another cliff nor the current White House from manning the money pumps to save its friends.
Volcker was asked point-blank if another crisis and another bailout was likely. His answer was cautious but clear.
“I would say we are not going to do it,” he said, but added, “I do not think that anybody can tell me there is not going to be another financial blowup of some kind. I hope we don’t have another big one-at least not in my lifetime.” But.
A man of faith in a godless age is hitting Americans where it hurts.
Mr. and Mrs. American Spectator Reader, let P.J. O’Rourke talk sense to your kids.
In Britain, defending your property can get you life.
It won’t take long for conservatives to scratch this presidential wannabe off their 2008 scorecard.
Was the President done in by the economy, or by the politics of the economy?