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.
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.
Volcker's campaign has a certain sharp logic. While it is too much to assert that both the New York Times and the New Yorker are read by the same 1.4 million people, it can be argued that it likely has been a far smaller group of readers who parsed through both lengthy pieces plus Volcker's own warnings in the New York Review of Books. And while it is likely that very few people outside of midtown Manhattan read any of them, especially within Washington's chattering community, those currently in the saddle both in the Congress and White House have surely heard reaction from those Ruling Class readers who take Paul Volcker very seriously indeed.
IT'S WORTH TAKING a moment to recall just who and what Paul Adolph Volcker is. At 83, there is not much that he has not done in the world of banking and international finance, with a couple of rescues of the American economy along the way. Trained at Princeton, Harvard, and the London School of Economics, he was presumably totally in sync with the wet Keynesians who have gravitated to Democratic administrations for the past 50 years. His early years were spent advancing through various analysis positions in and out of the New York Federal Reserve Bank, Chase Manhattan, and the U.S. Treasury. Yet when the global currency market collapsed in 1971, 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. His reward for that was the presidency of the New York Fed Bank, a post he held until Jimmy Carter made him chairman of the Federal Reserve.
Time has flattened somewhat our memories of just what a dismal economic pall paralyzed the hapless Carter. Any prospect of renewed growth was being smothered by double digit inflation, that is, until Volcker adopted the decidedly un-Keynesian tactic of choking off the very credit expansion that was fueling the price frenzy. Volcker and his tactics were roundly hated. Farmers used tractors to block the entrance to the Fed headquarters. Home builders flooded the Fed's mailroom with letter-sized blocks of two-by-fours on which they mailed their protests; Volcker used them in his office fireplace and gleefully pointed out he was following Carter's pious injunctions about saving energy. Despite that triumph, Volcker's reappointment by President Reagan in 1983 was done grudgingly and his refusal to endorse an early push to deregulate Wall Street led to his replacement by the doctrinally sound but ill-starred Alan Greenspan four years later.
In the last 20 years Volcker has kept his ticket to the luxury boxes of the Ruling Class by undertaking missions for the United Nations, serving as a personal financial adviser to the Rockefeller family, and being a regular attendee at the sacred rites of such conclaves of the mighty as the Group of Thirty, the Trilateral Commission, and the Bilderberg Group. But Volcker's influence and reputation comes from his refusal to preach to the lesser choir members of this community -- the apparatchiks who burrow within academia and at the foundations of the left. Volcker's economic philosophy, it turns out, is one of small "c" conservatism when it comes to financial markets in general and Wall Street's sell-and-be-damned ethos in particular.
To understand Volcker one must go back to Professor Codevilla's spot-on observation, "Differences between Bushes, Clintons, and Obamas are of degree, not kind." His proof is that Republicans in power never roll back the very intrusions of big government just installed by the Democrats. In such a world, questions of what is liberal versus what is conservative are not useful. When I say Volcker's economic philosophy is conservative I mean cautious, imbued with 50 years of experience with how addicted and reckless men can become in the pursuit of money. While Ronald Reagan was sincere in his belief that deregulation of Wall Street would lead to innovative progress, he also was being influenced by Donald Regan, the former bond hustler. And when Bill Clinton finally did ratify the dismemberment of the Depression-era Glass-Steagall barriers between commercial banks and investment banks, he was being nudged along in his ignorance by such water carriers for the investment house churn-and-burn set as his Treasury Secretaries Robert Rubin and Larry Summers.
Volcker responds to the notion that deregulation automatically leads to innovation and healthy growth with a snort of derision, often saying "the only useful banking innovation was the invention of the ATM." By long experience Volcker also realizes a coherent set of enforceable rules is the only guarantee that Wall Street -- or any marketplace -- can freely function.
LIKE MOST OF THE AMERICAN Big Business subset of the Ruling Class, the really big shakers on Wall Street have always wanted the kind of government that can be relied on to bail them out but also to impose some kind of certainty as long as those restraints don't really chafe. The Dodd-Frank bill raises more questions than it answers about either certainty or restraint, and Volcker's worries are surely being replayed to Mr. Obama by people to whom he must listen if he is not to suffer Jimmy Carter's fate.
So Volcker has little to fear by way of reprisal by the White House; indeed in the post-election aftermath his influence and his person may be even more visible than before as Mr. Obama realizes his initial in-house team has not done much to improve his prospects for 2012. The departure of such economic advisers as Summers and Christina Romer offers an opportunity for Mr. Obama to appoint advisers who will pursue more than a sham recovery of rising stock prices and bank profits.
But will the president turn to Volcker on Wall Street reform or anything else? It's a plausible bet. After all, as Professor Codevilla has pointed out about securing membership in the Ruling Class, "Once an official or professional shows that he shares the manners, the tastes, the interests of the class, gives lip service to its ideals and shibboleths, and is willing to accommodate the interests of its senior members, he can move profitably among our establishment's parts." Even in opposition.
By way of disclosure, I have been an admirer of Paul Volcker since I first covered him when he returned from Wall Street to become an undersecretary of the treasury for international monetary affairs and to play a key role in the Nixon administration's shift away from the collapsed Bretton Woods monetary system. Although Federal Reserve chairmen never give press interviews that can be remotely quoted or alluded to, when Volcker took that job he would allow me -- under the strictest constraints -- to come to him and ask often fairly stupid questions about finance that baffled me. Those tutorials, laced with his profound knowledge and healthy skepticism, are among my prized memories. I would not be alone in rejoicing if I thought Mr. Obama was finally paying attention to his advice.
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