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Sunday, June 28, 2009

Paul Volcker

Paul Volcker is an economist who was credited to have single-handedly regain control of the US financial mess in 1981, after taking office in 1979. At that time interest rates where soaring out of control, and Mr. Volcker called for a hard hand at fiscal discipline. Interest rates declined from 13.5% to 3.2%. Reagan's "boom years" would not have been possible if it wasn't for this feat.

You can read fully about Mr. Volcker by clicking here for Wikipedia entry. I for one never really read much about his past or achievements, except for the first paragraph. Mr. Volcker is 1st Chair of the President Obama's Economic Recovery Advisory Board. One could hope that Mr. Volcker's voice is carried over others, which to date, it hasn't.

I ran across an article that is well worth the full read. (click here). For your enjoyment I cut out the paragraphs I was most impressed with. Some of which you will see echoing my criticism of the "computer model" financial instruments that have ruined American Finance and need to be abolished. I for one wish his advice is followed to the fullest extent. The moment it is I would cover all shorts, and go long the American stock market for years to come.

----- Excerpted quote from article below ------

‘Speculative Fever’

The former Fed chairman started worrying about derivatives and structured debt such as mortgage-backed bonds in the early 2000s, his grandson says. In a 2000 interview with the New York Times, Volcker said he couldn’t make sense of the financial innovation going on.

“You obviously have a kind of speculative fever,” he told the paper. “It’s a kind of casino. It’s all the rage, trading certificates that have no intrinsic value.”

In 2005, Volcker was worried about the housing bubble, the U.S.’s growing trade deficit and banks’ increased risk taking.

“Under the placid surface, there are disturbing trends,” Volcker wrote in the Washington Post. “Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot.”

Overstretched Fed

The Obama administration initially wanted to give the Fed a larger role, people close to the discussions say. Volcker was opposed, arguing that too much weight on the institution could threaten its independence in setting monetary policy.

“Do we want to make the Federal Reserve the chief regulator too?” Volcker asked during a Bloomberg TV interview on April 29. “Maybe that’s going a little too far.”

The administration has since shifted away from having a single regulator, instead giving the Fed a partial role in monitoring systemic risk, along with a council of regulators.

Volcker’s concern about an overstretched Fed has shaped the views of key congressmen, aides on Capitol Hill say. House Financial Services Committee Chairman Barney Frank echoed Volcker’s views on regulatory oversight on May 28, saying he opposed a single regulator.

“My own preference is for a dual-track regulation,” Frank said, referring to two separate channels of regulation that would focus on the health of the banks and the need to monitor for systemic risk as suggested by Volcker’s G-30 report.

‘Political Games’

The PERAB is taking a broad look at financial reforms, including whether banks that take deposits should be barred from engaging in high-risk trading, according to some members. While Volcker has strong views on that -- he thinks commercial banks should be prohibited from owning hedge funds or private equity units, people familiar with his thinking say -- he’s listening to others in the group.

“We’re an advisory board, so we can present different viewpoints at the end to the president,” says board member Wolf.

The biggest obstacle to Volcker’s reform agenda is Summers, Volcker’s friends say. While the president’s top economic adviser has softened his anti-regulatory stance from his days as Clinton’s Treasury secretary, it will be difficult for him to accept some of Volcker’s proposals, they say.

That hasn’t fazed Volcker.

“If he’s of a different view, I’m sure he’ll recognize the wisdom of my view sooner or later,” Volcker said in the April interview.

“Don’t rule Volcker out yet,” says Kavesh, his longtime friend. “Paul worked under five presidents before, and he knows how to play the political games. As events unfold, he’ll take on a more direct, stronger role.”


NOTE: This entry was completed Friday, Blogspot isn't posting as scheduled.

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