PAUL VOLCKER: THE MARKET IS “BROKEN”
by ilene - September 23rd, 2010 7:34 pm
PAUL VOLCKER: THE MARKET IS “BROKEN”
Courtesy of The Pragmatic Capitalist
This is a superb summary of Paul Volcker’s must read comments at the Federal
1) Macroprudential regulation — “somehow those words grate on my ears.”
2) Banking — Investment banks became “trading machines instead of investment banks [leading to] encroachment on the territory of commercial banks, and commercial banks encroached on the territory of others in a way that couldn’t easily be managed by the old supervisory system.”
3) Financial system — “The financial system is broken. We can use that term in late 2008, and I think it’s fair to still use the term unfortunately. We know that parts of it are absolutely broken, like the mortgage
market which only happens to be the most important part of our capital markets [and has] become a subsidiary of the U.S. government.”4) Business schools — “We had all our best business schools in the United States pouring out financial engineers, every smart young mathematician and physicist said ‘I don’t want to be a civil engineer, a mechanical engineer. I’m a smart guy, I want to go to Wall Street.’ And then you know all the risks were going to be sliced and diced and [people thought] the market would be resilient and not face any crises. We took care of all that stuff, and I think that was the general philosophy that markets are efficient and self correcting and we don’t have to worry about them too much.
5) Central banks and the Fed — “Central banks became…maybe a little too infatuated with their own skills and authority because they found secrets to price stability…I think its fair to say there was a certain neglect of supervisory responsibilities, certainly not confined to the Federal Reserve, but including the Federal Reserve, I only say that because the Federal Reserve is the most important in my view.”
6) The recession — “It’s so difficult to get out of this recession because of the basic disequilibrium in the real economy.”
7) Council of regulators — “Potentially cumbersome.”
8 ) On judgment — “Let me suggest to you that relying on judgment all the time makes for a very heavy burden whether you are regulating an individual institution or whether you are regulating the whole market or whether you are deciding what might be disturbing or what might not be disturbing.
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Double dip or global deflation?
by ilene - September 21st, 2010 1:13 pm
Christopher Whalen writes about how the U.S. economy in first half of the 20th Century could be characterized as stagnant, with a brief growth spurt during WWI and a mirage of growth during WWII and the cold war:
Following the Crash of 1929, the pretense observed by both political parties that all was well in the U.S. economy evaporated into almost twenty years of economic stagnation. While the massive mobilization for WWII provided the appearance of a recovery, and the period of the Cold War extended this mirage on a sea of public debt and paper dollars, the basic issue of overcapacity remained.
The illusion continued through the 1970s when the housing sector took over defense as the main driver of economic growth. However, Chris argues, that what was perceived by most Americans as real growth was actually the result of deficit spending and "reckless monetary expansion" by the Fed, courtesy of Alan Greenspan and later Ben Bernanke. – Ilene
Double dip or global deflation?
The page proofs of my upcoming book, "Inflated: How Money and Debt Built the American Dream
The National Bureau of Economic Research just declared that the “recession” that began in 2007 ended in the middle of 2009, making it the longest downturn since WWII. The only problem is that none of the people who work at NBER today, which is one of my favorite research organizations, are old enough to remember what the U.S. economy was like before WWII; before the age of Keynesian socialism and the use of debt to stimulate growth and employment became standard policy in Washington.
Let’s start with the term “recession,” which itself reflects the assumption that economic growth is always positive and the trend line is always upward sloping…
Continue here: blogs.reuters.com
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Paul Volcker Obviously Reads Jr Deputy Accountant, Says America Can Learn From Europe Debt Crisis
by ilene - May 19th, 2010 10:43 pm
Paul Volcker Obviously Reads Jr Deputy Accountant, Says America Can Learn From Europe Debt Crisis
Courtesy of Jr. Deputy Accountant
How many times have I said this? Seriously?
Europe’s debt crisis shows the risks for the United States if it does not get its budget deficits under control, former Federal Reserve Chairman Paul Volcker said on Tuesday.
"If we need any further illustration of the potential threats to our own economy from uncontrolled borrowing, we have only to look to the struggle to maintain the common European currency, to rebalance the European economy, and to sustain political cohesion of Europe," Volcker said.
There, it’s official and Paul Volcker said so.
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Droppin’ Knowledge: Volcker On America’s Ability To Compete
by ilene - February 17th, 2010 12:50 am
Droppin’ Knowledge: Volcker On America’s Ability To Compete
Courtesy of Joshua M Brown, The Reformed Broker
I just snatched this little exchange out of the transcript of Paul Volcker‘s recent interview with CNN. The greatest Fed Head in history gives us his take on the competitiveness of America and what we must figure out how to do to become great again.
Volcker and I share the contention that having the majority of our best and brightest off in a corner trading with each other is not a good long-term trend for society…
From CNN:
ZAKARIA: You feel that the longer term issue, the big issue is really this issue of how do we get real growth. How do we get exports, manufacturing — not growth that’s based on borrowing, not growth that’s based on each of us selling each other our own houses in a kind of ascending spiral…
VOLCKER: Absolutely.
ZAKARIA: … of asset inflation.
VOLCKER: We’ve got to produce something that somebody else wants to buy.
ZAKARIA: How do you do that? What should we be doing?
VOLCKER: Well, you really want to get — fundamentally, I think we spent a — more than a decade — we spent 20 years inducing some of our brightest people, our most energetic people to go to Wall Street. And nobody wants to be a mechanical engineer or a chemical engineer or a civil engineer. They want to be a financial engineer.
If you go to a university graduation these days, and you get to the advanced degrees in mathematics, engineering, physics, you’re rather hard pressed to find an American. There are Chinese, there are Indians, they’re Taiwanese, they’re from the Middle East.
Look, it’s not easy to answer your question, because there’s no easy answer.
ZAKARIA: When you look at American industry, making it more competitive again, do you think that when you compare it to industry in China, or in India or in South Korea, is part of the problem that there is — our corporate tax rate is now the second-highest in the industrialized world?
We probably have more regulation. There’s the issue of tort, you know, and the way…
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Senator Bob Corker Needs to Be Updated on His Bank Failure History
by ilene - February 2nd, 2010 7:08 pm
Senator Bob Corker Needs to Be Updated on His Bank Failure History
Courtesy of Reggie Middleton
Senator Corker challenged Mr. Volcker’s stance in today’s congressional hearings on the Volcker Rule by saying that no financial holding company that had a commercial bank failed while performing proprietary trading. It appears as if Mr. Corker may have received his information from the banking lobby, and did not do his own homework.
Let’s reference the largest commercial bank/thrift failure of all:
From …
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The ‘Volcker Rule’ Will Be A Body Blow To Hedge Funds And Private Equity!
by ilene - January 21st, 2010 2:24 pm
The ‘Volcker Rule’ Will Be A Body Blow To Hedge Funds And Private Equity!
Courtesy of John Carney at Clusterstock/The Business Insider
At the heart of Obama’s new regulatory proposal is the ‘Volcker Rule.’
Named for Paul Volcker, the new rule would bar banks from owning or investing in or sponsoring hedge funds, private equity funds or proprietary trading operations. It’s still not clear how far this goes but a complete bar on investing in hedge funds or p.e. could be a serious blow to alternative investments.
Was Obama overstating his case? Or will redemptions from banks have to begin as soon as the rule takes effect?
Here’s the full quote from Obama’s speech:
It’s for these reasons that I’m proposing a simple and common-sense reform, which we’re calling the "Volcker Rule" — after this tall guy behind me. Banks will no longer be allowed to own, invest, or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit, unrelated to serving their customers. If financial firms want to trade for profit, that’s something they’re free to do. Indeed, doing so –- responsibly –- is a good thing for the markets and the economy. But these firms should not be allowed to run these hedge funds and private equities funds while running a bank backed by the American people.
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Did The President FINALLY Wake Up?
by ilene - January 21st, 2010 1:55 pm
Did The President FINALLY Wake Up?
Courtesy of Karl Denninger at The Market Ticker
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“Wake Up, Gentlemen”
by ilene - December 15th, 2009 12:00 pm
Paul Volcker’s message, passed along by Simon Johnson, with love. - Ilene
“Wake Up, Gentlemen”
Courtesy of Simon Johnson at The Baseline Scenario
The guiding myth underpinning the reconstruction of our dangerous banking system is: Financial innovation as-we-know-it is valuable and must be preserved. Anyone opposed to this approach is a populist, with or without a pitchfork.
Single-handedly, Paul Volcker has exploded this myth. Responding to a Wall Street insiders‘ Future of Finance “report“, he was quoted in the WSJ yesterday as saying: “Wake up gentlemen. I can only say that your response is inadequate.”
Volcker has three main points, with which we whole-heartedly agree:
- “[Financial engineering] moves around the rents in the financial system, but not only this, as it seems to have vastly increased them.”
- “I have found very little evidence that vast amounts of innovation in financial markets in recent years have had a visible effect on the productivity of the economy”
and most important:
3. “I am probably going to win in the end”.
Volcker wants tough constraints on banks and their activities, separating the payments system – which must be protected and therefore tightly regulated – from other “extraneous” functions, which includes trading and managing money.
This is entirely reasonable – although we can surely argue about details, including whether a very large “regulated” bank would be able to escape the limits placed on its behavior and whether a very large “trading” bank could (without running the payments system) still cause massive damage.
But how can Mr. Volcker possibly prevail? Even President Obama was reduced, yesterday, to asking the banks nicely to lend more to small business – against which Jamie Dimon will presumably respond that such firms either (a) are not creditworthy (so give us a subsidy if you want such loans) or (b) don’t want to borrow (so give them a subsidy). (Some of the bankers, it seems, didn’t even try hard to attend – they just called it in.)
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The reason for Volcker’s confidence in his victory is simple - he is moving the consensus. It’s not radicals against reasonable bankers. It’s the dean of American banking, with a bigger and better reputation than any other economic policymaker alive – and with a lot of people at his back – saying, very simply: Enough.
He
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Volcker: There’s No Growth Other Than What The Fed’s Pouring Into The Economy
by ilene - December 12th, 2009 3:00 pm
Volcker: There’s No Growth Other Than What The Fed’s Pouring Into The Economy
Obama advisor and former Fed chief Paul Volcker has an excellent interview this weekend with Germany’s Der Spiegel.
An excerpt:
SPIEGEL: The US has not yet instituted any kind of reform policy. What we see is the government and the Federal Reserve pouring money into the economy. If one looks beyond that money, one sees that the economy is in fact still shrinking.
Volcker: What should I say? That’s right. We have not yet achieved self-reinforcing recovery. We are heavily dependent upon government support so far. We are on a government support system, both in the financial markets and in the economy.
SPIEGEL: To get the recovery to the point where it is right now has cost a lot of money. National debt will probably reach $12 trillion in 2019. Just serving the debt costs $17 billion a year — at least according to this year’s forecast. That’s difficult to sustain.
Volcker: You’ve got to deal with the deficit and you’ve got to deal with it in a timely way. Right now, with the unemployment rate still very high, excess capacity is still evident, and the economy is dependent on government money as we said. We are not going to successfully attack the deficit right now but we have got to prepare for attacking it.
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The Banks Must Be Restrained, The Financial System Must Be Reformed
by ilene - December 9th, 2009 1:07 am
The Banks Must Be Restrained, The Financial System Must Be Reformed
Courtesy of Jesse’s Café Américain
There has been a loss of perspective with regard to the financial sector led by the Anglo-American banking interests.
This will have to change before there can be a sustainable economic recovery. This will be difficult to accomplish, because there exists a fusion of corporate and government desires to control the distribution of wealth and power that is opposed to any significant reforms.
"A certain type of person strives to become a master over all, and to extend his force, his will to power, and to subdue all that resists it. But he encounters the power of others, and comes to an arrangement, a union, with those that are like him: thus they work together to serve the will to power. And the process goes on." Friedrich Nietzsche, The Will to Power
Until then, the world will experience a series of asset bubbles and an increasing disparity in wealth between the productive and administrative sectors of the economy. This will continue until it becomes unsustainable, and unstable. And then it will change.
UK Telegraph
Ex-Fed chief Paul Volcker’s ‘telling’ words on derivatives industry
By Louise Armitstead
9:41PM GMT 08 Dec 2009
The former US Federal Reserve chairman told an audience that included some of the world’s most senior financiers that their industry’s "single most important" contribution in the last 25 years has been automatic telling machines, which he said had at least proved "useful".
Echoing FSA chairman Lord Turner’s comments that banks are "socially useless", Mr Volcker told delegates who had been discussing how to rebuild the financial system to "wake up". He said credit default swaps and collateralised debt obligations had taken the economy "right to the brink of disaster" and added that the economy had grown at "greater rates of speed" during the 1960s without such products.
When one stunned audience member suggested that Mr Volcker did not really mean bond markets and securitisations had contributed "nothing at all", he replied: "You can innovate as much as you like, but do it within a structure that doesn’t put the whole economy at risk."
He said he agreed with George Soros, the billionaire investor, who said investment banks must stick to serving clients and "proprietary trading should be pushed out…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW.