Volcker Gets Mad

Excerpts from Bloomberg:

Regulators Resist Volcker Wandering Warning of Too-Big-to-Fail

Dec. 15 (Bloomberg) -- Paul A. Volcker visited nine cities in five countries in the past eight weeks to warn that bankers and regulators “have not come anywhere close to responding with necessary vigor” to the worst economic crisis in 70 years.

There is a lot of evidence that financial weaknesses brought us to the brink of a great depression,” Volcker, 82, said Dec. 8. at a conference in West Sussex, England. He told executives there that the changes they’ve proposed are “like a dimple.”

Two years after the start of the deepest recession since the 1930s, no U.S. or European authority has put in force a single measure that would transform the financial system, based on data compiled by Bloomberg. No rule- or law-making body is actively considering the automatic dismantling of banks that Volcker told Congress are sheltered by access to an implicit safety net.

There’s little evidence that policy makers are heeding Volcker, the former chairman of the U.S. Federal Reserve. More than 50 regulatory overhaul proposals have been submitted in the U.S. and Europe, the data compiled by Bloomberg show. Lawmakers and regulators have debated new rules for capitalization and leverage, central clearing for derivatives trading, oversight of hedge funds and ways to monitor systemic risk.

While the U.S. House of Representatives has approved a financial regulation bill, authorities in the U.S. and Europe have sidelined measures that would automatically force changes in the structure of financial companies that Bank of England Governor Mervyn King called “too important to fail.” Volcker is leading a chorus arguing for restricting the size or primary functions of financial institutions. Volcker’s Travels

“He is spot on,” Joseph Stiglitz, a Columbia University professor who won the Nobel Prize in economics in 2001, said in an e-mail.

Volcker, who heads President Barack Obama’s Economic Recovery Advisory Board, told Kentucky’s Georgetown College students “we need to produce more, finance less,” according to the school’s Web site, and said in Bonn that some banks have “pervasive conflicts of interest.” In Berlin, he told Bloomberg television that “this isn’t any time to go back to business as usual.”
After Volcker became chairman of the Federal Reserve in 1979, he restricted the money supply, forcing interest rates to 20 percent to break an inflationary surge. Following the recession that ensued, President Ronald Reagan nominated Alan Greenspan in 1987 to replace Volcker, who had succeeded in driving the inflation rate to 1.1 percent by the end of 1986.

Dubai, China

A new debt crisis may threaten the economy before regulatory changes are enacted, according to Simon Johnson, an entrepreneurship professor at Massachusetts Institute of Technology in Cambridge and a former International Monetary Fund chief economist. Most of the world’s large international banks continued to expand as stock markets plunged and credit froze last year, data compiled by Bloomberg show.

After Dubai, the second-biggest sheikhdom in the United Arab Emirates, said Nov. 25 that it might delay debt payments by a development unit, analysts questioned whether the European Union would back Greece’s debt, roiling Greek stocks and bonds. Abu Dhabi promised yesterday to help the Dubai unit avoid defaulting. In China, a 4 trillion yuan ($585 billion) stimulus package, five interest rate cuts since September 2008 and $1.35 trillion in lending this year may lead to an asset bubble, according to Erwin Sanft, head of China and Hong Kong equities research at BNP Paribas SA.

Making meaningful regulatory changes is urgent now because this is the window of opportunity,” MIT’s Johnson said in an interview. “If that window closes, we’re asking for trouble.”
Resolve Fades

U.S. and European governments’ $15 trillion of guarantees, cash injections and other financial industry support, based on Bank of England data, may have been too successful. After Obama and other leaders opened 2009 promising sweeping financial overhaul, credit thawed, markets rebounded and resolve for “fundamental reform” faded, according to Susan Hoffman, a professor of political science at Western Michigan University in Kalamazoo and author of the book “Politics and Banking: Ideas, Public Policy, and the Creation of Financial Institutions.”


After being brought in as an advisor to the Obama administration, Paul Volcker has discovered his appointment was for appearance only. Volcker's warnings have been repeatedly dismissed and ignored by policy makers in the US and Europe. Volcker understands the risks to the system that are building threaten to disrupt the global economic system. Economic heavyweights Joseph Stiglitz and Simon Johnson of MIT have thrown their support behind his proposed reforms. The issue is a lack of political will to do "the right thing".

If the high level of leverage remains in the system, with banks and financial institutions failing to build adequate reserves and increase Tier 1 capital, a major crisis is inevitable. The path governments and central banks are on that, to quote Volcker, "brought us to the brink of a great depression", pushes us past the brink, and into the abyss.


  1. PW, it is very likely that the level of leverage in the financial system will not change. The banks prefer a system of high leverage. Do you believe that it is inevitable that a major currency crisis is coming?

  2. I continue to be amazed at the stubbornness of bankers and policy makers to limit leverage. There seems to be a widespread delusion that denies the benefit of deleveraging a financial system that is far into the leverage danger zone. The authorities do not seem to realize that leverage is a sword that cuts much deeper on the way down when a crisis does occur. The correct action to allow some asset deflation would ultimately benefit the economy in the longer term. The reflation attempts with QE and ultra low interest rates simply tries to blow a bigger bubble.
    Ultimately this will fail.
    When the failure occurs, if reflation temporarily succeeds, then I expect a currency crisis the likes of which we have never witnessed.
    My guess on the occurrence of the next crisis is within two years. Its severity will depend upon the degree of re-inflation's success.


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