Obama team ignores Volcker at its peril
articles.moneycentral.msn.com
The former Fed chairman has terrific advice about reining in risky bank practices to prevent another financial meltdown.
But the administration apparently isn't listening.
By Bill Fleckenstein
MSN Money
Contrarian Chronicles10/26/2009 12:01 AM ET
The launch point for this column is an above-the-fold front-page story in last Wednesday's New York Times : "Volcker's voice, often heeded, fails to sell a bank strategy" by Louis Uchitelle. He writes about former Federal Reserve Chairman Paul Volcker's views on the financial system, contrasting that with Alan Greenspan's opinions.
Bank deregulation and the credit crisis
According to Uchitelle, the key difference is that Volcker "wants the nation's banks to be prohibited from owning and trading risky securities, the very practice that got the biggest ones into deep trouble in 2008." Regrettably, "the administration is saying no, it will not separate commercial banking from investment operations."
Also regrettably, even though Volcker has volunteered to help, the Obama administration doesn't seem to be listening to him.
Now, I haven't written much about Greenspan since I wrote my book "Greenspan's Bubbles," which pretty much exorcised my demons. But if anyone wants to become really outraged over the predicament the economy and financial system are mired in, all you need do is pick up a copy and flip through it.
Though it's even more shocking now than it was in real time to see Greenspan's arrogant, cavalier attitude, the most important point is that the disaster we've endured (and are still dealing with) did not have to happen.
What Greenspan wrought
It may seem hard to believe (if one hasn't studied the period), but the overwhelming bulk of our problems were a result of Greenspan's policies and the causes he championed. (Read "How Greenspan's policies hurt you" for a sample of my views on this.)
In "The Warning," PBS' "Frontline" last Tuesday night went into the issue of financial derivatives and cited Greenspan's complicity in advocating essentially no oversight, which helped lead to that market's out-of-control
growth. In the history of the world, I don't believe any one person has ever done as much financial damage to so many as Greenspan has.
Video: Volcker on fixing the financial system
In any case, the article notes that Volcker's proposal would "roll back the nation's commercial banks to an earlier era, when they were restricted to commercial banking and prohibited from engaging in risky Wall Street activities." You know, the system that worked for 60-odd years before it was dismantled in 1999 in the wake of the collapse of Long-Term Capital Management. Greenspan wanted us to believe, at the time, that had the Fed not bailed out that hedge fund, it would have led to a financial calamity of disastrous proportions (I disagree).
Even after the Greenspan Fed rode to the rescue in a wildly reckless and unnecessary fashion (and, as I pointed out in the book, his monetary policy during that period was particularly irresponsible), he still advocated the repeal of Glass-Steagall. This while the LTCM debacle remained fresh in everyone's mind.
'Banks are there to serve the public'
Obviously, Volcker didn't see the need for that unshackling of the banking system. He said: "The banks are there to serve the public, and that is what they should concentrate on. These other activities create conflicts of interest. They create risks, and if you try to control the risks with supervision, that just creates friction and difficulties (and ultimately fails)."
That is a pretty succinct synopsis of what's transpired.
Volcker continued: "People say I'm old-fashioned and banks can no longer be separated from nonbank activity. . . . That argument brought us to where we are today."
Indeed it did, and Volcker is not old-fashioned. He just has a large dose of common sense, as do most people who emerged unscathed through the tech-stock and real-estate/credit bubbles, especially the latter.
Don't blame me
Meanwhile, here's how Greenspan -- who still favors the dimwitted policies he always has favored -- responded to a question on the subject: "No form of economic organization can fully contain bouts of destructive speculative euphoria." Yes, that is true, but that only means he should have been even more vigilant, not less so. He is basically espousing the view that because no company or system is perfect, he can't be held responsible for what's happened.
That's a little like his policy during the bubble periods, when he claimed that bubbles couldn't be spotted or headed off. Should one occur, therefore, his plan was to deal with the aftermath with his vaunted "asymmetrical" approach to monetary policy (i.e., to be easy in good times and, when those excesses lead to a train wreck, to be even easier, then repeat). As I noted earlier, if you want to get your blood boiling, re-read what he did and said during the bubble periods.
In any case, the Obama administration ought to listen to Volcker. We ought to learn our lessons from the mistakes of the Greenspan period.
It's a shame that after the near-vaporization of the financial system last year, with all the attendant consequences, so little intelligent thought has been given to how we got into the mess and how to prevent us from getting there again -- and I won't even bother to touch the third-rail issue of these out-of-control banks, rescued by taxpayers, that are now handing out massive bonuses to their employees while there's still a decent chance that their balance sheets don't tell the truth.
Housekeeping
Recently I was interviewed once again by Eric King. (Click here to listen.) As always, he did a tremendous job asking thoughtful questions. Another site that readers might want to check out (where a conversation between me and its proprietor has been posted) is the thought-provoking and very irreverent Diary of a Mad Hedge Fund Trader. |
