The thrust of this New York Times piece on the gigantic (6’8″) Economic Recovery Advisory Board head Paul Volcker is that the president and his economic team see him as a nuisance they don’t know what to do with. What’s interesting, though, is why they consider his advice — and giving them advice is his stated role — useless: because he’s coming from too far to the left.
Paul Volcker has always been a very independent-minded economist. That quality helped him achieve his greatest accomplishment, which was when, as Fed chairman under Reagan, he defeated the pernicious inflation that had plagued the country through the ’70s. In fact, his management of the money supply was one of the greatest domestic economic policy accomplishments of the past century, and was only possible because he and Reagan were impossibly steadfast in their commitment to curing inflation.
That same obstinance, however, is now making him an outsider and a forgotten man. The Times article highlights his advocacy of a modern-day Glass-Steagall bank regulation, enforcing the split between commercial and investment banks. Such a provision, he is arguing, would prevent too-big-to-fail insitutions from taking on risks that could potentially lead to bailouts.
Volcker’s plan, the article clearly shows, is falling on deaf ears: “So Mr. Volcker scoffs at the reports that he is losing clout. ‘I did not have influence to start with,’ he said.”
His plans conflict with the rest of the Obama team’s ideas for two reasons. The first is that they are too far to the left. The article notes that one of the very few major economists to side publicly with Volcker is the Nobel laureate Joe Stiglitz, who is well to the left of Obama team members like Larry Summers or Austan Goolsbee. Although the regulations Volcker is proposing are probably well within mainstream left-wing political ideas, most economists see technical problems with placing American bank-holding companies at a disadvantage.
The second problem is that Volcker’s plan is decidedly anti-bank. To enforce a modern-day Glass-Steagall, the Feds would have to break up Goldman Sachs, which is now a bank holding company, and spin off the investment banks that were snatched up by bank holding companies at the height of the financial crisis. Needless to say, these measures would be hard to sneak by the banks.
These two problems illustrate two corresponding facts about the administration’s philosophy. The first is that they are not so much left-wing as they are technocratic, as seen by the fact that a lefty stalwart’s words are falling on deaf ears. The second is that the administration is thoroughly pro-big business and pro-the banks.