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Feature
Ignoring the Tall Man
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.
About the Author
James Srodes, an author and broadcaster, is a former Washington bureau chief for Forbes and Financial Worldmagazines. His latest book, On Dupont Circle: Franklin and Eleanor Roosevelt and the Progressives Who Shaped Our World, is being published next week. His email address is srodesnews@msn.com.
Letter to the Editor View all comments (14) | Leave a comment
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MoeBlotz| 11.16.10 @ 8:09AM
Mr.Volcker appears to have no firm convictions,but adjusts his position to suit the ruling class rather than the country class. Why else would he have allowed the tricky one to remove the almighty dollar from the gold standard? By doing so Mr.Volcker enabled subsequent presidents to manipulate our money supply to serve their needs.
Bob K.| 11.16.10 @ 9:12AM
I think that one important thing is Mr. Srodes observation that Mr. Volcker's "nose is inside the tent."
Bob K.| 11.16.10 @ 9:28AM
After reading Mr. Srodes' comments about Mr. Volcker's economic philosophies on page 3 above, I am reminded of William F. Buckley Jr's favorite aphorism which he credited to his co-founder of "National Review," Willy Schlam. "The trouble with Socialism is Socialism. The trouble with Capitalism is Capitalists!"
Mr. Volcker appears to be a very practical Conservative and Capitalist.
Gill O’Teen ✝✡$| 11.16.10 @ 10:31AM
It doesn’t matter who’s in or who’s out in dee sea. Unless chopper bennie is stopped cold turkey from buying $600 gigabucks of treasury bonds with abra-cadaver money, OUR Nation is doomed to sink irretrievably under a hyperinflated sea of red ink. The dye for that color will be OUR Blood. Just this morning, I could swear I heard the top-of-the-hour announce that beavisbud’s maladministration has brought the inflation rate under control by no longer using fuel or food in its calculations. Ponder that for a minute, longer if needed for the light bulb to click on. This is the same concept that could bring The Unemployment Rate under control by simply excluding all those out of work. The tip that just maybe the official Unemployment Rate might be inaccurate are the words “seasonally adjusted.” Even if the wizard of worthless cash can avoid the hyperinflation of Zimbabwe, he will increase the National Debt by a like amount. All he’s ultimately doing is using borrowed money to buy borrowed money. If he’s not using borrowed money, he’s radically increasing the money supply without a corresponding increase in OUR Nation’s wealth. This will result in hyperinflation. Always has before. Other than he went to Harvard and Em Eye Tea, whereas I only walked by, just what makes him think he can control the basic law of supply and demand. We are in for a very bad year. The National Inflation Association is projecting that a loaf of bread will cost more than 20 bennie-bucks, about a bennie per slice. The Good news is that the per-slice cost can be decreased by simply cutting thinner slices. Given this, unless Volcker can halt this impending disaster, I’m totally indifferent to his job prospects.
Gill O’Teen ✝✡$
Don’t Tread on Me.
gill.Oteen07041776@gmail.com
“NIA projects that at the average U.S. grocery store it will soon cost $11.43 for one ear of corn, $23.05 for a 24 oz loaf of wheat bread, $62.21 for a 32 oz package of Domino Granulated Sugar, $24.31 for a 32 fl oz container of soy milk, $77.71 for a 11.30 oz container of Folgers Classic Roast Coffee, $45.71 for a 64 fl oz container of Minute Maid Orange Juice, and $15.50 for a Hershey's Milk Chocolate 1.55 oz candy bar. NIA also projects that by the end of this decade, a plain white men's cotton t-shirt at Wal-Mart will cost $55.57.” Stolen directly from National Inflation Association’s November 5th article, “NIA Projects Future U.S. Food Price Increases.” Their special U.S. food price projection report is available to download for free at
http://inflation.us/foodpriceprojections.pdf
Only 796 days to go
Oldefarte| 11.16.10 @ 12:02PM
We most probably will be in desperate need of Volcker' interest rate hike expertise when the inflation explosion resulting from Bernanke's purchasing of government bonds occurs. The problem should not be business regulation, but instead, government regulation. If not for the political correctness of the 1977 CRA and the followup by the GSE's or providing welfare in the form of AFFORDABLE HOMES, then possibly the business excesses relating to Wall Street banking may not have even happened. Without the insanity of governmental political excesses that result from the corrupted/fraudent misuse of taxpayer money, businesses/banks could simply be left on their own to sink or swim on their decisions made [ie bankruptcy]. The only true emergency was/is the TOO BIG TO FAIL banking issue, which was rightfully rescued by the government [since to do otherwise would have destroyed every depositor's funds contained within same and the country's economy as a whole]. All other issues could be cured simply by the American electorite having the intelligence to vote for professionally capable candidates to run their government instead of feel-good morons with Harvard Law degrees, etc!!!!!!!!
J. Brick| 11.16.10 @ 12:06PM
I will never forgive Paul Volcker for allowing himself to be used as a political prop so that the Obama Aministration could gain some credibility on economic matters.
Volcker was absolutely masterful in leading this country through the inflationary minefield of the late 70s and early 80s. As far as I'm concerned his speech on October 6, 1979 laying out a new course for the Fed on monetary policy belongs in the pantheon of historic speeches affecting the monetary system. It is the tonic needed now to bring us out of debt spiral that is choking the economic future of this country. But sadly as Volcker himself has said, it is probably too late to administer such tough medicine that was appropriate 30 years ago as our economy has probablygone too far down the debt addiction road at this point.
My own view on the matter is that Volcker, while not a political animal, was a lifelong Democrat who subordinated his sound economic thinking to Party loyalty. It was an unfortunate choice because he was one of the few people, perhaps the only one, with the clout to change the economic course of this country when it was most needed.
Clinton nee Publius | 11.16.10 @ 12:33PM
I find it interesting that Mr. Volcker now warns us against the dangers that he helped inculcate with our failed Federal Reserve System, failed fiscal appropriations system and failed commercial banking system. We are headed off the precipice and people like Mr. Volcker are perfectly willing to hold open the door and help us over the edge - provided the monopoly our banking industry has enjoyed at our exclusive risk and expense can continue indefinitely.
That's the real poison here. All of this suffering is due to the fact we decided the Federal Reserve System and fractional-reserve banking was the only way to do thing - that is to say the only way to do things that ensures the banking industry monopolizes wealth, credit and money for their exclusive benefit and the benefit of the ruling-class. For those of you who are in denial you need to explain why 10% of households control more than 75% of the wealth in our country and why the average Wall Street banker earns 8 times what the median family earns in the United States. It's time we had the banking, monetary policy and credit system that worked for the rest of us and not just the banking industry and liberal, big-government corruption junkies.
Learn more about it with my FREE white paper on a replacement for our current system called the, "Consumption Banking System":
http://www.capitalismbookstore.....System.pdf
fundamentalist| 11.16.10 @ 1:36PM
“…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.”
Someone should remind Volcker that the financial crisis began with the investment banks, over which Glass-Steagall had no control. And the few commercial banks got into trouble because they held onto home loans instead of selling them. The whole mess began when housing prices collapsed. There would never have been a financial crisis among investment banks had housing prices not collapsed. And housing prices collapsed because they had been blown into a bubble by massive credit expansion by the Fed.
“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.”
They always say that and then bail them out anyway because the big banks own the regulatory agencies.
“Volcker was credited with steering the Nixon administration through the delicate shoals of cutting loose gold's stranglehold on the dollar and building the new international convertibility regime that exists today.”
He should be in jail for that. Abandoning gold left the Fed with no restraints whatsoever, except massive inflation. So we can thank Volcker for the stagflation of the 1970’s as well as the recent depression.
Dai Alanye | 11.16.10 @ 2:07PM
We seem to be in the position of Lincoln, forced by lack of good candidates to appoint the least worse general. Certainly Volcker's tight money bias seems preferable to Obama's inflation-all-the-time program, but I have severe doubts about government interference in markets such as a Reconstruction Finance Corporation would constitute.
Further, anyone who not only accepts the reality of man-made global warming, much less pontificates upon it, must be considered a doubtful candidate for an influential economic position. To paraphrase Laura Ingraham--Shut up and control the money supply!
As for what should be done, when Sarah Palin becomes President and appoints me as economic adviser, I shall simply determine what policies will be in the interest of Goldman-Sachs... and do the contrary.
Gill O’Teen ✝✡$| 11.16.10 @ 2:51PM
At 16:25 ET yesterday, the National Debt Clock U.S. GDP was $14,612,630,893,004. That 600,000,000,000,000 bennie bucks the whirlybird wizard plans to drop on tax-cheat tiny timmie is a bit more than 41 times greater. In other words, if the gum’mint confiscated 100% of OUR wealth annually, it would take more than 41 years to break even, excluding interest payments. Is there anybody not currently locked away in a padded cell who can explain why this is an excellent idea? Or are such folks the only ones who can?
Gill O’Teen ✝✡$
Don’t Tread on Me.
gill.Oteen07041776@gmail.com
Alice: “But I don't want to go among mad people.”
The Cat: “Oh, you can't help that. We're all mad here. I'm mad. You're mad.”
Alice: “How do you know I'm mad?”
The Cat: “You must be. Or you wouldn't have come here.”
Blatantly stolen from Charles Lutwidge Dodgson’s classic “Alice in Wonderland” which he wrote pretending to be Lewis Carroll.
Only 796 days to go
Gill O’Teen ✝✡$| 11.16.10 @ 8:05PM
With all due respect, Gill. You are an idiot. 600,000,000,000 is a 6 followed by 11 digits. 14,612,630,893,004 is 14 some odd trillion, which, unless my kindergarten math teacher was as foolish as you are, is larger than a mere billion. 600 billion has 12 significant digits; 14 trillion has 14. With these new-to-you facts in mind, you can quickly calculate that your projections are not as dire as you think. Using updated debt clock figures as of 26:26 ET today, OUR GDP was $14,613,828,125,793 (note: trillions). The Gum’mint only need confiscate everything for about 15 days to pay for chopper bennie’s holiday gifts. Now, that I’ve straightened you out, I’m headed to the airport to get a full body massage from TSA. They put the frisk in frisky.
Gill O’Teen ✝✡$
Don’t Tread on Me.
gill.Oteen07041776@gmail.com
“Twelve for 23... It doesn't take a genius to see that's under 50 percent.” - attributed to Dick Vitale at http://www.basicjokes.com/dquotes.php?cid=93
Only 796 days to go
PattyMor| 11.16.10 @ 3:29PM
The big, lumbering Federal oversight and bureaucracy has made things worse. Just where was the Fed, FDIC, SEC, etal. (not to mention the oversight commitees in Congress) during the housing crisis and banking crisis. Wasn't the theory that these agencies would stabilize things? Instead they have had just the opposite results. Failures all. Once business is under the federal thumb, then politics is interjected into the mix. We get such things like the Community Reinvestment Act and concepts like redlining.
Get rid of all the bureaucracy and replace with private sector solutions. Do we need FDIC? How about private insurance for those who want it. Need a mortgage, why not go to a bank--how quaint.
The other thing is, none of these agencies are constitutional. Without a corrupt judiciary these bureaucracies would not pass constitutional muster.
Bill Hussein O'Stalin| 11.16.10 @ 6:11PM
I wonder if Mr. Srodes or anyone else has read the bill? It's laced with poisonous race and gender preferences that will simply lead to more financial disaster for America.
There is no way to stop financial disaster when the financial houses are required to buy into collectivism by hiring people because of their race and gender. In fact, I'm sure many ACORN candidates are slicking their resumes up.
Paul Volcker will be unable to do anything because no one can withstand the tidal wave of disaster waiting as banks become another bank curve in the pool game of collectivism.
There is very little to do now but watch as the ship of state turns over, and the deck chairs which have been arranged over and over, fall off never to return.
On another note all you have to do is look at the phony two year moratorium on earmarks to see what's coming next. There will be no fiscal austerity. The ban on earmarks should be permanent but the ruling class in both parties can't afford that.
On that alone they will find common ground. Screwing the public at every turn, in every way and in any way they can get away with.
The swine!
JLK| 11.18.10 @ 12:33PM
How can we take this guy seriously when he keeps mentioning "AGW" as a serious problem. ( I guess he didn't get the memo about the 2 name changes in 2 years for AGW)
The best he could do for this country is very publically resign from an Administration that will never take his ideas seriously if they conflict with their own blessed ideology.
JLK