By Simon Johnson
A great deal of the popular anger directed at big banks is completely legitimate, as put nicely by John Cassidy at the end of his interview with Treasury Secretary Tim Geithner,
“The hardest part of his job, Geithner often says, is getting people to comprehend the inner logic of a financial-rescue operation, and the unpopular actions it entails. In fact, his problem may be not economic illiteracy but its opposite: Americans understand all too well what has happened. Financial crises have a way of revealing aspects of our economic system that otherwise remain obscured, such as the symbiotic relationship between Wall Street and Washington, the hidden subsidies that financial firms sometimes receive from the Fed and other government agencies, and the fact that the vast profits that firms like JPMorgan Chase and Goldman generate depend in part on an implicit guarantee from the taxpayer. When ordinary Americans are confronted with these realities, they get angry.”
Paul Volcker is also angry.
Of course, Paul Volcker expresses himself in the measured language of a distinguished technocrat. But he is very worried about our current financial structure and where it is heading. Speaking today at the Peterson Institute in Washington DC, Mr. Volcker made two broad points (Marketwatch coverage) – both of which we also emphasize in 13 Bankers.
1. The financial sector does not add anywhere near as much social value as its proponents claim.
“The question that really jumps out for me is, given all that data, whether the enormous gains in the financial sector — in compensation and profits — reflect the relative contributions that sector has made to the growth of human welfare” (from NYT story)
2. Too big to fail banks are alive and well – and this poses a major problem to our future prosperity.
“There is an expectation that very large and complicated financial institutions will not be allowed to fail,” he said. “Unless that conviction is shaken, the natural result is that risk-taking will be encouraged and in fact subsidized beyond reasonable limits.”
The message yesterday and from other statements made by Mr. Volcker is clear. Our biggest banks are out of control and will not be reined in by the measures currently on the table. We need a much stronger approach to big banks – an approach that will strip government-backed banks of their ability to take crazy risks and, most likely, an approach that significantly constrains (and hopefully even reduces) their size.
The Baseline Scenario 
‘Wake up, gentlemen’
“I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence,” said Mr Volcker, who ran the Fed from 1979 to 1987 and is now chairman of President Obama’s Economic Recovery Advisory Board.
He said that financial services in the United States had increased its share of value added from 2 per cent to 6.5 per cent, but he asked: “Is that a reflection of your financial innovation, or just a reflection of what you’re paid?”
Paul Volcker – Dec 2009
http://tinyurl.com/yff4mpg
Jesus, am so sick of hearing what OUGHT to be done.
When has Obama ever agreed with Volcker that the TBTF banks should be broken up? Where is his understanding that each of these banks, investment and otherwise gobbled up all competition previous to Glass-Steagall being repealled? Why, after nearly two years from the first hint of trouble(Bear Stearns)has absolutely NOTHING been done? Is he ignorant of the facts? Please… Is he complicit? How can we come to any other conclusion.
President Obama no doubt has a lot on his plate. But nonetheless the TBTF issue and other issues such as registered exchanges for derivatives (swaps) and separation of commercial banking from investment banking (or “firewalls” if he decides to do it half-ass) should be numero uno on the “to do list”.
President Obama needs to ask himself if he wants to be remembered like “W” Bush largely will be remembered: for 8 years of nothing policy and taking the entire country into a panic attack the last 4 or so months of his Presidency. Does he want to be remembered for that?? And/Or remembered for passing the problems on to the next President??
Paul Volcker praised yesterday Adair Turner, head of the British FSA and also head of the Financial Stability Board, so the game is still on.
I would not be surprised, as Summers is rumoured to be on leave, i.e ousted, that Geithner would be part of the package. The choice of Morgan Stanley as underwriter for Citi seems to me as part of a Trojan horse move, a hot seat is waiting for him, either in the can,or on the board of GS….Imho, there will be no REAL financial reform as long as this small Secretary is in office..and what a great move from Bam if he wants his party to stand a chance to win the elections
Mr. Volcker is the right messenger for the right message. He has a way of keeping the markets calm, yet, able to effectively get his points across to those willing to listen and not just hearing what he has to say about the too-big-to-fail dangers in the economy.
“…legitimate questions remain about whether he is the right person to face down Wall Street and channel public anger in a constructive direction. Still, it is worth remembering that he was hired not for his critique of contemporary capitalism or for his abilities as a communicator but for his experience as a financial firefighter.” Putting out the financial fires–I don’t think so. And what would the Senior Economist Advisor Mark Zandi have done, had Senator McCain won…..hmmmmm.
The banking industry is working hard on defeating and scaling back as much of Senator Dodd’s finance reform bill, while the critics on the other end of the economic spectrum continue to point out its flaws. Again, we’re kind of reminded of that phrase “don’t let perfection be the enemy of the good.”
It’s too late, and all just smoke and mirrors, and propoganda at this point. The rules of the game of American capitalism were permanently and irreperably destroyed when the decisions (Bush AND Obama)were made to bailout and resurrect the TBTF banks post mortem, and the corresponding refusal of the (Bush and Obama) administrations to impliment the legally mandated Prompt Corrective Action resolution authority that has been on the books and has existed since the Savings and Loan debacle of the 1980s. It’s that simple. And, I am unaware of anyone successfully demonstrating the ability to “un-ring” a bell.
The problem is a fundamental one. Not only there is a symbiotic relationship between Washington and Wall street, the economists and policy makers have come to believe that what is good for wall st is also good for the country. ONLY UP TO A POINT.
As long as the Fed and the administration continue to believe that bidding up prices of financial assets is the way out of this mess, they will continue to do the WRONG thing. Given a choice between doing the right thing of taking pain in the long run (reduce consumption and work off debt) and higher S&P 500 tomorrow – the FED has chosen the latter everyday, FOR THE LAST 20 YEARS. Unless this insane fascination with bidding up financial prices to stimulate growth is debunked, the policy makers will continue to screw up.
Most likely, the administration is waiting and watching how foreign governments are handling their too big to fail problem. Governments now want an overall approach. Will it do any good to restrain and breakup US banks and allow foreign banks to come in with their larger size and overwhelm our financial system.
Volcker’s talk got almost no press.
I didn’t anything on CNBC and Bloomberg showed him speaking – with no sound – while they interviewed a guy from Keefe Bruyette who described the industries preferred alternative: capital controls (as managed by the Fed, no doubt). Note: they would have TBTF banks keep higher reserves.
It really seems to me that a sober, intellectual debate is a losing approach. Its clear that the industry understands that some kind of reform is inevitable, but they want to shape that reform so that: provisions are weak, and administration of the “reforms” falls under institutions that have their best interest at heart and/or they can influence.
Unless the debate is raised to one of concentrated power and taken to the people, REAL financial reform is a dead issue. (PS I think 13 bankers is great — but will J6P will read it?) The financial reform that is in the cards will be comprised of things like Fed-determined capital controls, and a consumer protection agency that falls under the Fed and whose mission is secondary to the Fed’s current mission — especially “safety and soundness.”
Why do the banks demand that consumer protection is secondary to safety and soundness, and how is that related to TBTF?
1) Current policy is to allow the banks to bilk us all to pay for the financial mess. Not allowing them to do so would threaten their bonuses . . . um . . . I mean safety and soundness.
2) That same policy is likely to be applied when a bank gets into trouble in the future. The Fed will help TBTF banks avoid the resolution process as much as possible – even at the expense of consumers.
Using their customers as a financial resource when a bank is stressed could rightly be termed the “Consumer Soft Put (CSP)”. The larger the bank, the greater is the CSP. CSP relies on # of customers and industry concentration (pricing power).
NOTE: One can easily imagine the Fed being lobbied in the future to include the “real option” of the CSP as a form of secondary capital for satisfying the increased capital requirement for TBTF banks.
Robert Reich makes a great point, if this administration were serious about financial reform it would direct the SEC to prosecute bank executives under Sarbanes-Oxley.
Instead we get blah blah blah blah blah blah blah.
http://robertreich.org/post/485015444/fraud-on-the-street
“Our biggest banks are out of control and will not be reined in by the measures currently on the table. …” – what somebody thinks Paul Volcker thinks.
Can anybody produce a quote by Paul Volcker in which Paul Volcker specifically says the Dodd bill will not rein in our out-of-control banks?
I don’t know where you got this Summers “on leave” BS but I think it’s a load of crap. In some ways I dislike Summers, but he is typical of his ethnic group in that he is exceptionally intelligent. I doubt he’s getting off the merry-go-round until a new Pres. term starts—if ever.
Occam’s razor
White House Says Reports on Larry Summers ‘Ridiculous’
26 Mar 2010
http://www.cnbc.com/id/36058410
Bloomberg had some video of Volcker. CNBC doesn’t broadcast anything that doesn’t include pompoms or a prostitute with a neon sign on her forehead that says “markets are never overvalued”
Volcker: Proprietary trading not central to crisis
March 30, 2010 – excerpt
(Reuters) – “Paul Volcker, the White House economics adviser who crafted a proposed ban on proprietary trading by banks, said on Tuesday the practice was not central to the financial crisis — the very argument used by some critics of the proposal.
Volcker, however, still championed the ban — dubbed the “Volcker rule” when President Barack Obama unveiled it in January — and said commercial banks do not need speculative activities to make money.
Despite Volcker’s latest pitch for the proposal, it is unclear if it will survive the Congressional debate on how to overhaul the regulation of financial firms and markets.
“Particularly, proprietary trading in commercial banks was there but not central” to the crisis, Volcker, a former Federal Reserve chairman, said in an address at the Peterson Institute for International Economics.”
http://www.reuters.com/article/idUSTRE62T56420100330
Inaction is implied consent
That does not say that Paul Volcker is currently running around claiming the Dodd bill will not rein in the out-of-control big banks.
I think there is an awful lot of invocation of Volcker here that is not supportable, and I rather doubt he would agree with some of it.
He likes parts of both bills, but, if anything, he indicates a tilt toward the Dodd bill.
“Typical of his ethnic group”? This means…what?
Mr. Geithner is convinced that everybody else but him is stupid. Why else would he try & cheat us taxpayers out of $32,000 in income taxes?
I really enjoy reading this blog and the comments attached to each article, even though I am not an economist and most discussions here force me repeatedly to reach for my “Dictionary of Economic Terms.” I am a grass roots political activist, business owner and simple taxpayer.
I have listened to Paul Volker’s presentation to the Peterson Institute twice now (on C-SPAN, with my dictionary in easy reach), and from both his presentation and the Q&A session that followed, I have taken a couple of general observations:
1) Mr. Volker is having a difficult time having his suggestions given adequate weight by the White House, even though he is in a better position than either Larry Summers or Timothy Geithner to understand both the economic and political implications of whatever financial reform is finally passed by congress, and
2) Foreign countries, particularly the UK, seem to be far more interested in cleaning up the current economic mess, laying blame and levying tax penalties on those who caused said mess, as well as taking steps to insure regulations are in place to make a reccurence less likely, than the U.S.
Speaking from the perspective of an ordinary citizen deeply involved in political motivating and getting out the vote activities in my community, there are a few things I will demand from this White House before trusting President Obama and his economic team to protect the country from another nightmare such as the one we out here on Main Street are currently experiencing.
There is no understandable reason why the taxpayers should continue to be on the hook for bailing out the gamblers and theives resident in TBTF banks, insurance companies and Wall Street. If certain banks and insurance companies are too big and Wall Street is too much of a casino to pay for their own mistakes they should be broken up, regulated, fined and taxed to within an inch of their lives. And it would not hurt anyone’s feelings on Main Street to see a few of these arrogant, self-important con men treated like the economic terrorists they are – handcuff them and parade them in front of the TV cameras, then throw them in an undisclosed location until we can figure out a way to try them in a “special” court of law.
Paul Volcker is not calling for systemically important entities to be broken up. He’s a realist.
“I think we do reasonably well to prevent it from getting more concentrated. That’s just a practical judgment,” he said, after a question from an economist in the audience. “If you can stir up some support for what you are saying, I am probably not going to be in the vanguard but I would be interested in seeing what you can do.” – Paul Volcker
Sounds like a veiled bit of scarcasm leveled at Summers’ famous gaff…
Nice personal Haiku redleg.
“Paul Volcker is not calling for systemically important entities to be broken up. He’s a realist.”
He’s 82-years-old, yes he’s a realist. :-)
A quick reply; an sorry if it seems slightly off topic, but Far-fetched the metric of Volker and the Think Tank are hard at work trying to keep this all together…
I wrote this post in a Business course on a Professors discussion post:
I stated that, wars are never popular; and certainly do not promote long-term economic stability, unless you can show a actual product and or service that brings the spoils of what can produce economic stability. Certainly the wars continue within congress to get a strong Financial Reform Bill signed.
In this situation, the think-tank of economists and war room pundits–has used the continued employment theory of keeping many enlisted on the taxpayer’s roles. This includes many of the private contractors also enlisted on the federal taxpayer’s roles.
This is a further stimulus to try to buoy our economy and to ensure that the economy would not take a nose dive and see us hit well over 12% or that we would approach possibly even 14.5% unemployment figures–signaling a major double-dip recession or that of a depression.
These kinds of numbers can certainly cause a nosedive, as one can be certain. I do not agree with why we continue these wars, but am trying to understand the “Money Math” behind the scenes. Some metrics, if the signal of all to come home; could cause all that would have these folks coming home right today, now, would find it quite difficult to maintain employment.
Not because they can’t do their job at their employer; but because their corporation and or public position may be on the chopping block of further lay-offs. Lay-offs due to the employers dealing with profit margins, continued harsh economic head winds facing our economy ahead due to huge deficit spending, and extended liquidity offered by all the central banks around the world.
Just some added thoughts to question motivations and decisions of this elite government for the people and “Hopefully by the people”…
The psychology as I picked up in the book in our class has even spread to worldviews as to the metrics that can be at play…
Far-fetched, Not Any More!
James Gornick
I am so tired of all the accolades for Paul “Big Deal” Volcker. I am convinced the bankrupt situation we find ourselves in today had its origins with this man. Here we have the first of many central bankers of the day to figure out you could actually pay a nation’s debt by simply printing money. What a brilliant concept. And what has this created? An unemployed, foreclosed upon and bankrupt society so strung out on debt it no longer can offer a measly single digit interest rate for a passbook savings account without fear of collapsing today’s fragile, propped up housing, stock, and automobile market.
Christ free Agnes, this capitalistic crony was instrumental in devaluing US currency in 1971 after closing the foreign gold window. And you can see where that has got us. A buck is worth .74 cents in Europe. Ever ask yourself why they keep this guy around. Think it might be for another round of devaluation then?
Yeah, meet me at the barricades there redleg?
My point is it’s pointless to expect anything from Obama.
Hold on, we’re checking with legal now.
Sharkie wrote:
“I am so tired of all the accolades for Paul “Big Deal” Volcker. I am convinced the bankrupt situation we find ourselves in today had its origins with this man.”
I’ve heard similar concerns echoed, but I’m no rocket-scientist. I think the situation with Mr. Volcker has more to do with the, “any port in a storm” idiom.
A frog in water
Doesn’t feel it boil in time.
Dude, we are that frog.
Simon Johnson: “The financial sector does not add anywhere near as much social value as its proponents claim.”
Of course not, how could it be, when the regulators never discuss the purpose of the financial sector and only favor what is perceived as having low default risk.
I went to the UN to argue for the developing countries http://bit.ly/c6hkgA but I later realized that my arguments were just as valid for the developed world.
One of the things you hear over and over about being a flaw in Mr. Volcker’s plans is that you can’t spin-off proprietary trading and other activities because the banks don’t often know what’s proprietary and what’s being done for external customers. In fact, I just heard Maria Bartiromo talking with Sheila Bair of the FDIC yesterday about this. Bartiromo, of course, mouthed Wall Street’s position on this, being the suck-up that she is.
This is utter nonsense. Do people actually think that profits from proprietary trading and customer activities somehow all go into one big pot and get divided up at some point down the road? That’s simply absurd. There is an account associated with every trade — whether it be a customer account or a house account — and the banks know precisely what to do with the profits at the moment they make them.
It’s just astonishing to me that people fall for this stuff, and that the argument gets serious consideration. I guess the banks just figure that if they say something enough — “truth by repeated assertion” — people will buy, especially people who are predisposed to being sympathetic to them, like our politicians and the financial media. It’s just sickening.
As Dr. Evil would say, “riiiiight.”
So, that $180 billion the taxpayers forked over to AIG wasn’t related to the proprietary trading being done by the counterparties, like Goldman Sachs? Baloney! Of course it was.
Credit, like blood, dries.
A beaten dog whines for scraps.
Debt is slavery.
Unfortunately, this is all part of the Volker Ruse. Not that Mr. Volker means to fool us. No, he speaks the truth as he sees it. It’s a ruse to the extent that any of us believe that he speaks for, or his thoughts resonate with, this administration. To date, the proposals advanced and supported by this administration are abominations that bear little similarity to the views expressed by Mr. Volker.
Simon, why don’t you get on every media outlet that will have you and explain that the Wall Street community of banking oligarchs are like vampires, draining the economic blood from our economy, and turning us all into financial zombies. In their world there is no “win-win” there’s only “we win.” But, just how long can a parasite suck blood from its host and expect the host to live. What happens when the parasite hasn’t got any more blood to suck. Yeah, they can print money (which is really what the Fed has licensed them to do) and use it through their attorneys and quants to bleed us (and the rest of the world, in fact) dry. This is a formula for revolution, and someone on Capitol Hill or in the White House need to realize this soon, before we all are exsanginate with nowhere to go and no money to spend if we found a place.
You must find places to educate people and let them know that they have been widely deceived by anyone who speak in advocacy for the Wall Street status quo or anything resembling it. I am afraid that it will take a lot more than Paul Volcker to convince the wider population of this. We need these guys to make up the national debt that they have created almost singlehandedly, and then be sent to spend the rest of their years in Sing Sing and have their banks be disbanded and sold off in small pieces.
There is little doubt that they know almost everything about who owns every dollar they invest, but, interestingly, during early part of the crisis, according to The Big Short by Michael Lewis, they would not own up to what they should be paying out for the CDS’s they had sold, and many of them claimed that their systems were down or they couldn’t figure it out. Later they made good, but we all know that when they say they don’t know theirs from everyone elses, that is truly absurd, after all, why would anyone invest with them unless they were confident that their money was being tracked as theirs.
He should not do so because that will not solve anything, what’s done is done, and on the road forward you need banks and bankers doing what they were supposed to do before this bunch of regulators told them to be stupid AAA followers.
Which of course does not mean that a certain numbers of bankers should not go to prison, and most regulators forced to parade down 5th Avenue wearing their respective cones of shame and never allowed to regulate anything else but the thermostats of their home.
While you’re parading perps through the streets on the way to prison (I’m all for locking them into stocks on the public square and allowing passersby to take a whip to them, myself), don’t forget the ratings agencies. I can’t imagine anyone buying securities based on questionable, if not fraudulent, assets if they hadn’t been rated as AAA investments.