Paul Volcker Picks Up A Bat

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.

Read more . . .

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Tags: Chairman of the Federal Reserve, Council of Economic Advisers, Federal Reserve System, Glass-Steagall Act, paul volcker, Paul Volcker Picks Up A Bat

This entry was posted on Sunday, December 20th, 2009 at 11:09 pm and is filed under Consider This, Finance, Need to Know, Shape of Things to Come?, Worth Repeating, baseline scenario, economics. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.