Wednesday, April 9, 2008

Paul Volcker Speaks

Refreshing to hear Paul Volcker, the Federal Reserve prez pre-Greenspan speak. Compared to Uncle Al who is trying to give us economic updates on a weekly (daily?) basis, and defend his legacy of easy money and total lack of regulation (free markets fix everything) Volcker has not said much but when I read what he says, here is another intellectual who agrees with much of what some of the "outliers" have been saying (the group who has been ignored by the Kool Aid mongers the past few years). There seems to be something in the water the past decade where no one in power seems to ever admit they make a mistake - very disconcerting. This is the trap Greenspan seems to be spinning into.... anyhow, I digress. I just prefer the truth, no matter how painful it is; hence listening to guys like Volcker is much more interesting and enlightening.

First from NY Times: Ex-Fed Chairman Chides Current One
  • The biggest financial crisis in a generation — a downturn that officials at the Federal Reserve acknowledged in minutes released Tuesday might be “prolonged and severe” — is turning the traditionally reserved and omniscient central bank into an institution that seems to be in the throes of family therapy.
  • In a speech on Tuesday, Paul A. Volcker, the imposing former Fed chief who felled the runaway inflation of the 1980s, chided the current chairman, Ben S. Bernanke, for toeing “the very edge” of the bank’s legal authority in orchestrating last month’s bailout of the beleaguered investment bank Bear Stearns.
  • “Out of perceived necessity, sweeping powers have been exercised in a manner that is neither natural nor comfortable for a central bank,” Mr. Volcker told members of the Economic Club of New York. (does that sound familiar? Sort of like what a President and VP do during times of "permanent war")
  • His remarks came on the same day that Alan Greenspan, Mr. Bernanke’s immediate predecessor as chairman, deflected criticism of his tenure in an interview with The Wall Street Journal, dismissing as “unfair” claims that his policies stoked an untenable housing bubble.
  • Indeed, Mr. Volcker also implicitly questioned Mr. Greenspan’s cheerleading of the “bright new financial system,” that “for all its talented participants, for all its rich rewards, has failed the test of the marketplace.” (All I can say is Bravo for someone with clout to say that out loud - its a farce system of wealth transfer and huge risk taking with little penalty for those who take the risks)
  • Mr. Greenspan said he did not regret a single decision he made during his time as the Fed chairman. (sounds like a President I know who said in an interview I saw last year that he could not think of one mistake he made - these guys are just "perfect" apparently - egos are a dangerous thing)

From the Wall Street Journal: Volcker's Demarche

  • 'You don't have to predict it. We're in it." Thus did Paul Volcker respond to a question Tuesday about whether he still predicted a "dollar crisis" in the coming years. We hope current Federal Reserve Chairman Ben Bernanke is paying attention.
  • Mr. Volcker, a former Fed chief, has a well-earned reputation for straight talk, but there is always strong institutional pressure not to second-guess one's successors at a place like the Federal Reserve. This makes his speech to the Economic Club of New York all the more remarkable for the sharp questions he raised about inflation, Fed independence and moral hazard.
  • Mr. Volcker noted that when "concerns about recession are rife," the central bank will be tempted to "subordinate the fundamental need to maintain a reliable currency" to the impulse to shore up a flagging economy. The danger is that you lose both battles, as the U.S. did in the 1970s, and wind up with stagflation.
  • The present climate, Mr. Volcker told his audience, reminded him of nothing so much as the early 1970s. Then as now, certain commodity prices were rising fast – he cited oil and soybeans as two examples. Then as now too, these were explained away as speculative price run-ups and not as a harbinger of a broader inflationary trend.
  • We all know how that ended, and Mr. Volcker knows better than anyone. He was the one who, at the end of that decade, had to step in and raise interest rates to punitive levels to break the back of that bout of inflation. With commodity prices spiking again – soybeans are $12 a bushel today compared to $7 a year ago – Mr. Volcker is warning the Fed not to let inflationary expectations become embedded once again.
  • Mr. Volcker also argued Tuesday that the Fed's strenuous efforts on behalf of the housing market risked looking "biased to favor particular institutions or politically sensitive constituencies," in this case the housing industry. He did not argue that no government intervention was warranted – the crisis was, he said, "too threatening" for the government to stand aside. (again, I am shocked that someone of his stature says that out loud - fantastic stuff)
  • But the Fed has a particular duty to defend the integrity of the "fiat currency" in its charge. And exchanging dollars for "mortgage-backed securities of questionable pedigree" both raises the specter of moral hazard and potentially undermines the world's faith in the integrity of the Fed's balance sheet. Unless the Fed can shut the door it opened with its guarantee of $29 billion worth of Bear Stearns paper – which "seems highly unlikely," in Mr. Volcker's words – it will have to take on oversight of the institutions it is now implicitly back-stopping.

Marvelous stuff. The truth shall set us free - if people are willing to listen to it.

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