For most the past 12 months, Paul Volcker was sitting on the policy sidelines. He had impressive sounding job titles – member of President Obama’s Transition Economic Advisory Board immediately after last November’s election, and quickly named to head the new Economic Recovery Board.
But the Recovery Board, and Volcker himself, have seldom met with the President. Economic and financial sector policy, by all accounts, has been made largely by Tim Geithner at Treasury and Larry Summers at the White House, with help from Peter Orszag at the Office of Management and Budget, and Christina Romer at the Council of Economic Advisers.
With characteristic wry humor, Volcker denied in late October that he had lost clout within the administration: “I did not have influence to start with.”
But that same front page interview in the New York Times contained a well placed shock to then prevailing policy consensus.
Volcker, legendary former chairman of the Federal Reserve Board with much more experience of Wall Street than any current policymaker, was blunt: We need to break up our biggest banks and return to the basic split of activities that existed under the Glass-Steagall Act of 1933 – a highly regulated (and somewhat boring) set of banks to run the payments system, and a completely separate set of financial entities to help firms raise capital (and to trade securities).
This proposal is not just at odds with the regulatory reform legislation then (and now) working its way through Congress; Volcker is basically saying that what the administration has proposed and what Congress looks likely to enact in early 2010 is essentially — bunk.
Speaking to a group of senior finance executives, as reported in the Wall Street Journal on Monday, Volcker made his point even more forcefully. There is no benefit to running our financial system in its current fashion, with high risks (for society) and high returns (for top bankers). Most of financial innovation, in his view, is not just worthless to society – it is downright dangerous to our broader economic health.
Volcker only makes substantive public statements when he feels important issues are at stake. He also knows exactly how to influence policy – he has not been welcomed in the front door (controlled by the people who have daily meetings with the President), so he’s going round the back, aiming at shifting mainstream views about what are “safe” banks. Many smart technocrats listen carefully to what he has to say.
This strategy is partly about timing – and in this regard Volcker has chosen his moment well. The economy is starting to recover, but this process is clearly going to take a while and unemployment will stay high for the foreseeable future. At the same time, our biggest banks are making good money – mostly from trading, not much from lending to small business – and they are lining up to pay very big bonuses.
Not only is this contrast – high unemployment vs. bankers’ bonuses – annoying and unfair, it is also not good economics. Bankers are, in effect, being rewarded for taking the risks that created the global crisis and led to massive job losses. And they are being implicitly encouraged to do the same thing again.
The case for keeping big banks in their current configuration is completely lame. Even if we are lucky enough to avoid another major any time soon, the fiscal costs are enormous and coming right at you (and your taxes).
Now that Paul Volcker has picked up his hammer, he will not lightly set it aside. He knows how to sway the policy community and he knows how to escalate when they don’t pay attention. Expect him to pound away until he prevails.
By Simon Johnson
This is a a slightly edited version of a post that previously appeared on the NYT’s Economix; it is used here with permission. If you would like to reproduce the entire piece, please contact the New York Times for permission.
The Baseline Scenario 
If only there was an index tracking Volcker’s impact – we could short the h*ll out of it!
“There is no benefit to running our financial system in its current fashion, with high risks (for society) and high returns (for top bankers).”
There is a great benefit to bank executives.
This is the best bit of news I’ve read all morning!
Go Volker! Can’t agree more. The current clumsy machinations of Citicorp to manipulate the relatively small capital portion of their balance sheet at the ultimate expense of depositors, taxpayers and the security of the payments system is yet another example of why action needs to be taken soon in the direction Volker is recomending. I fear, however that the silverware isn’t bouncing high enough off the table when he pounds his fist.
Not only is Volker’s message the right one, it’s the one the public has been waiting to hear. He was probably right to wait since rumblings of a breakup too early in this tepid “recovery” may have cost the government more money in bailouts in the short term.
Obama is not stupid, you may hate his policies but he’s not stupid. He will eventually start listening to Volker as the general opinions shift. It’s also hard to ignore the 7 ft. tall guy in your lobby.
Are you really putting your faith in Volcker’s hammer and his ability to swing it? Tell me its not true… I remember his tenure at the Federal Reserve all too well.
Americans need money from the Treasury not credit from the banks! All Volcker and his ilk can offer is more credit! Jobless recoveries!
Main Street needs real money (not credit money) that will circulate through the economy and produce a recovery for people not bankers!
By the way, how is Argentina doing these days! Higher and faster growth rates than the USA? How come we never hear of China’s national debt and consumer credit problems?
All in all a good article, Mr. Johnson, please keep them coming!
Note that McCain and Maria Cantwell (D-WA) are now proposing revoking Glass – Steagall.
Paul is part of the problem ! Read this link:
http://americaspeaksink.com/2009/12/unemployment-benefit-extensions-are-a-blatant-lie/
“Main Street needs real money (not credit money) that will circulate through the economy and produce a recovery for people not bankers!”
I happen to agree rather strongly with this – with the proviso that a significant amount of that money should be financed by permanently created base.
The dollar has been on a 3 month tear… I’m sure the Fed feels good about that (and about themselves) since it holds down import prices, as signalled by its eagerness to cut its credit easing program (as DeLong properly calls it, in contrast to QE). Unemployment, of course, dissappoints again.
Yeah man, boring v exciting. Like Taunter said
“The key act in separating the Boring from the Exciting is this:
the government, including the Federal Reserve, is legally barred from financially supporting an Exciting firm.”
http://tauntermedia.com/2009/09/08/reform-week-finance-industry/
Had former Treasury Secretary Hank Paulson not gone down on his knees, begging and trying to scare the crap out of the Congressional leadership for bailout money (and lying about its intended use), we might have been in a better position today, to reform our financial institutions in a way the New Deal had evolved for Franklin Roosevelt. (Kudos goes out to our local Congressman for voting against the bailout funds on both voting occasions in the House.)
President Obama does listen to Paul Volker but is sidelined by the White House Chief of Staff Rahm Emanuel on behalf of the investment counterparties of Secretary Geithner and Dr. Summers, more later…
smart technocrats
Ugh.
Cheers,
Carson
Yeah, when will that be-2016?
Morning violenomics roundup:
The article has a cartoon of Simon holding a sledgehammer and towering over a Citigroup in ruins. But no matter how many times you keep taking whacks at Citigroup, it refuses to die.
Now that Paul Volcker has picked up his hammer, he will not lightly set it aside. He knows how to sway the policy community and he knows how to escalate when they don’t pay attention. Expect him to pound away until he prevails.
This after Krugman’s Python-Davito routine yesterday:
Throwing Momma from the train
You say tomato, I say tomato
And…..some very well connected regulators who used to be, or are in the future going to be bankers themselves….
Haha! George, you just made my morning.
Volcker’s the one and only who’s anywhere near power and this kind of microphone who is stating the truth.
(Him and Sanders, but nobody takes Sanders seriously. I can’t think of anyone else.)
Break up the big banks, proactively (no paper “resolution” nonsense which we know damn well would never work politically or pragmatically). That’s not the only thing but it’s the first and most important thing.
I believe you mean RESURRECTING and/or RE-ADOPTING Glass Steagall. As in they want Glass Steagall and/or an equivalent to be re-deployed.
And that, dear readers is part of the problem. Mr. Volcker is not without his problems, as is Mr. Geithner and Mr. Bernanke (on whose confirmation Sen. Bernie Sanders now has a very public hold). None o fthem, in my view, should be any where near U.S. Economic policy. Ditto and a half for Larry Summers.
But absent Paul Krugman – who I adore as much for his slightly rumpled look as his writings which are accessible to so many – who else is there on the nationale conomic stage who can garner the kind of attention that Volcker generates? And who else could be picked to replace Bernanke or Geithner who doesn’t have some Wall Street and/or banking industry ties?
Volcker is one of the people to whom these ties lead. This gets at the core problem though: How do we properly vet our administrators? We don’t do it, first of all, by letting the bad guys do the vetting. Nearly every one of us knows someone who is smart, capable, principled, and more concerned with wide-ranging social justice than with feeding the power of their own networks. These people need to step forward, or be thrust forward, given the tools, and then placed in a situation where they are isolated from influence and corruption. No more Mr. Smith Goes To Washington But Then Impales Himself On The Sword Of Compromise and Pragmatism.
Good work. I am glad to see you helping spread the word. About timing, though, it seems to me that, with banks repaying TARP, the economic decline abating, and complacency setting in, people will not be listening.
Mr. Johnson,
I wholeheartedly agree that repealing Gramm-Leach (i.e. reinstating the Banking Act aka Glass-Steagall) is the most sensible and proper course of action.
As someone who actually regulates one of the “systemically important” institutions, I can tell you it is impossible to get an accurate sense of risks one of these institutions face; and I have access to all the material, non-public information that I want.
Institutions like these are too big to monitor (much less fail) or control. Truth be told, the people who run these firms can’t even get accurate assessments because they are simply too complex. For goodness sake, Basel II is really just an admission by the regulators that the businesses are too complex to apply uniform measures of risk.
Butters,
Then with respect, can you and some of your colleagues come out o fthe shadows, and turn this sort of stuff over to Congress or the media? If you, from the inside, can see how hard it is, you need to spread that information.
Granted, you will be commiting career suicide of a certain kind – so I don’t make the request lightly. But “we the people” keep looking at the situation – not knowing a small fraction of what you know – and drawing the conclusions that “you” aren’t doin gyour jobs. Sounds like you CAN’T do your jobs. And no one but you can tell that story to the public.
Paul Volker, the man that made Ronald Reagan a legend in his own mind. Reagan was lucky enough to enter office when the Fed had interest rates near their all time high. As interest rates fell Reagan just kept looking better and better. The last Fed wonk to get a President thrown out of office brought in FDR for a 16 year run. Volker removed the you know whats from Jimmy Carter and handed them to RR wrapped in a silk ribbon. And the facts are that Jimmy C presided over a lower Federal budget deficit then either his predecessor or his replacement.
I not knocking Mr Volker. He’s got some real ones.
What is past is past. What matters is stabilizing the banking system in a way that maximizes options to maintain stability by the system elites. That means recognizing that formulaic approaches always fail due to the inherent uncertainties of social coexistence. The banking behemoths are way beyond the capacity to impart agility if for no other reason than multiple complexities. The big banks need separation of deposit taking from investment banking. An intelligent and flexible separation is needed. No management is capable of controlling a multinational megabank like the present ones. Not only are these behemoths zombie like from size, they are subjected to the political vagaries of the many nations they operate in.
Citi is a poster child for all the problems people now see turned into disaster. Citibank, N.A has 68 % of it’s depositor balances outside the United States as of the end of 2008. Yet the bulk of it’s loans are inside the United States based on where it’s revenues are derived. How is it possible for such a megabank to be regulated by one national regulator since Citibank itself is a United States National Association? Every state has it’s own brand of unruly national political interfaces. Citi is so complex it is impossible to regulate were it wholly a United States Bank let alone Citigroup itself being a US domiciled bank holding company.
Megabanks operating in a number of large first world states let alone elsewhere simply means Citi is able to function more or less as it pleases. At the same time megabanks like Citibank have demonstrated mangerial loss of control if they ever even had workable management of the whole organism. It is in the nature of things that all the different regulatory organizations of the various states will not have an easy time breaking up these banks or even ruling them. Yet, it must be done.
Only smaller pieces less monolithically connected may be well regulated by state regulators. As it is, this regulation would require state to state cooperation over long periods and not just in ad hoc emergency situations. Consistent many state regulation of any multinational bank organization over long periods is a very tall order. It might passably work with a a far less concentrated organization than the top heavy and increasingly incompetent US holding company arrangement.
Is an intelligent new version of Glass Steagall even possible to pass ?
I really do wonder why Obama picked Geithner for Treasury Secretary. As head of FRNY, Geithner watched as the banks imploded then somehow got backed into a corner with the AIG bailout.
Is there anyone writing up a new Glass-Steagal act? Or are the representatives of the people too busy writing amendments to the mess that is health care reform?
Must confess that watching the health care reform activities leaves me glum about the prospects for financial reform.
Again, having spoken out against the too big banks publicly frequently over a decade, when most were in awe of the growing banks I believe I have earned myself to opine in this matter… and I opine that it is not so much a question of eliminating the too big banks but eliminating the regulatory hormones that have artificially helped their growth.
It’s is high time to invoke the Volker philosophy, i.e. sanity in banking and financial regulation. We are all sick to death to see America being destroyed by the fat Wall Street oligarchy and its Capitol Hill shills. Let’s get behind Paul 100%, and get the Geither/Summers team repealed. Onward and upward with Glass-Steagall. Please, Mr. Santa, all I want for Christmas is a country where we all have the chance to succeed. Not one that looks more like Tsarist Russia before the (unfortunately overreactive) revolution. Otherwise, we may see somthing like the Russian debacle in the not too distant future when it looks like China has become us and we have become Nigeria.
Don’t bother. It’s a lame piece of right-wing drivel.
Would you people stop whining and complaining about what the banks are getting away with, and get back to work. You’ve got at least six generations worth of debt to pay back to them.
yes, resurrecting.
I was surfing the net and came across a video in which (paraphrasing from memory) SJ says, ‘the Constitution needs to be amended to rein in the influence of lobbyists on government. This is entirely possible. There is precedent. For example, the Supreme Court decided income taxes were illegal so the Constitution was amended.’
I found his clarity quite shocking.
“our biggest banks are making good money – mostly from trading,”
Given that trading is zero sum, who are they trading against? At who’s expense are their profits being derived?
Guess what… it’s you and me, and our pension funds, and 401Ks. Anybody without inside market information, and the ability to manipulate the market.
Big Banks…it is all the same. I wish they would invest more online as they have great digital assets. Per Evan Kramer’s most recent white paper on the “New Corporate Digital Leadership”, these large companies have missed a big opportunity without a Chief Internet Officer. http://tinyurl.com/yeez84y
Repealing Glass-Steagall is a no-brainer since it makes banks smaller, simplifies regulation and is costless. It is not an essential element of reform nor is it sufficient but it is certainly helpful. What is essential is to ensure that investors, rather than counter-parties, depositors and taxpayers, take the hit when financial institutions fail and that problems can be resolved quickly.
Jerry J, you are on my list of favourite frequent commentators at Baseline. And yes … there are others :)
I would take the long position against your short.
If the financial crisis is past but the economy is in the doldrums, the politics of the situation will be the driver. And increasingly, the politics will require that the financial services sector be positioned as renegades who’ve sold their country down the river and require corralling and punishment rather than as partners in regulatory reform. All the lobbyists and all the political contributions and all the career path strategies in the world won’t change that.
Volcker has always been the Administration’s Plan B. Not a relief pitcher to spell the starters in the late innings, but the replacement to the inherited approach when it either failed economically or became politically untenable. Perhaps there was no alternative to working with the established system at the outset. But the price of being seen toadying to Wall Street is getting too high.
My holiday forecast–the shifts in Washington this winter will be interesting, but opaque.
Jerry points out the real issue – the whole point of multinational corporations fleeing to a globalization model is to do exactly what monarchs, elites, and aristocrats have always striven for- to erase the capacity of nationalistic ideals (i.e., “We the People”) from interfering with their amassing of wealth and their unbridled exercise of economic power.
And since more than 50% of the top economies of the world are now Corporations (not Nations), the multinational corporations have us (the “We the People” citizens of nations) by the short and curlies. The US cannot regulate these Multinational giants any more than the US can regulate Iran, the multinationals just set up shop in a tax-free enclave such as Dubai, or Luxembourg or the Maldives. I fact, as a Nation, we should declare war on these huge multinational corporations, but, surprise, surprise, if you read any of the defense initiatives coming out of the Pentagon, you will quickly learn that our armed forces have been captured as well, since their mission is to defend our “economic interests at home and abroad.”
Oh, woe is us! We took a ride on the fascist alligator, and ended up inside. We are all just serfs now, living in a feudalistic corporate fascist police state. At least in feudalism you got to keep a little bit of food to feed your family. I made $45,000 last year and every penny gets spent on health insurance, rent for my office and my crappy apartment, for gas, for car repairs… I can’t afford to buy even flowers for my Mom for Christmas. I’m behind on my rent, behind on my electricity bill, my phone’s been shut off… Gotta go – I have to make some money to pay my 29.99% interest Chase credit card. God Bless America!
Oh. I forgot to mention I owe the IRS $10,000 in past taxes, the state $2500 in past taxes, the hospital $3500 in bills which health insurance didn’t cover… and from what I understand… I GOT IT EASY!!! Happy Holidays, y’all.
Volker’s voice on this issue is extremely important. Of course we need to break up the banking/investment banking system. Many of us have been advocating that for some time. And now McCain has stepped in to push legislation that Democrats should have initiated.
But that is just a start. Unless we get the casino mentality under control, our capital markets may never again be the engine for industrial and economic growth. Is it a coincidence that the proliferation of financial products that enable and encourage betting–as distinguished from investing–accompanied the near collapse of our economic system? Finance for the sake of finance is a recipe for disaster and the more folks who say it the better.
If this administration doesn’t wake up to this reality, we will be paying taxes to tea-partiers in a couple of years and finance will be triumphant.
I agree with the comment about financial innovation. The small business on main street wants to make products and services that people need and want. Financial innovation is about picking up the shavings as the money twirls around. Greenspan would lean into the mike at a congressional hearing whispering sweet nothings about financial innovation. We were seduced.
Intriguing post Butters, but I’m with Philip H. Someone, somewhere must muster the courage to come forward with some hard evidence that will unmask these PONZI scheme’s. How is it possible that a regulator cannot “get an accurate sense of risks one of these institutions face.”; – or how is it possible that “the people who run these firms can’t even get accurate assessments because they are simply too complex”, – but yet these same people manage somehow to get an “accurate assessment” of profit from these unknown unknown products and services. Something is rotten. Either the accounting is insufficient, (and how is that possible?) – or the models, and the products and services are intentionally maliciously obtuse, and/or deceptive, – and then how is that not ILLEGAL!!!???
Crimes are involved, either of ommision – or intentional deception. Any product, or service that is too complex to comprehend – should and must automatically be relegated to the realms of thievery and/or illusion. Numbers are funny things, easily manipulated, and if polluted, rendered useless by one false calculation.
The besmirching of Volker reaks of the wingnut redneck Amerika message-force multiplying of fictions and myths as truths, and sliming any and every opponent as anti-Amerikan, givingaidandcomforttotheenemy, spawnofthedevil.
Volker, warts and all is dead on in his poignant criticism of the finance oligarchs, and the necessity of dismantling the socalled TBTF malignancies.
Until society is rid of these malignant bloodsucking squidlike cancers, there will be more pain and suffering, and atrophy, and eventually death. In the end, after all the feeble medicines and remedies are haphazzardly applied, – the cancer wins and destroys the host. These evils must be excoriated completely and permantently.
TBTF, and tocomplextocomprehend institutions and models are malignancies sucking the blood and life out of vibrant societies in order to feed the predatorclass alone and exclusively.
These evil monsters must be defeated, dismantled, and destroyed, so that future generations will never again be forced to confront and surmount blatant evil, ruthless toxicity, and pervasive malignancy.
Welcome to Amerika!
This is all easy to understand. We live in a fascist state, and policy is dictated by banks, insurance and pharma.
Nothing will work, short of complete overthrow of the gubmint or (if we’re lucky) a complete systemic collapse, brought about by the idiotic policies now being pursued.
I was being rather pessimistic. But if suffering drives political change, Africa would look rather different… these things can work both ways. Either way Volcker’s interview is fantastic.
JPM has 90 Trillion in notional derivatives. This is larger than the entire worlds GDP. Trillions more in hidden losses have yet to be revealed.
Obama will fire the “Failed Men”- Rubin, Summers and Geithner when the S&P Crashes through 500.