The “Circus” is Finally Starting to Listen to Volcker

After keeping former Fed Chairman Paul Volcker in the back office of the circus (where he was put to make it LOOK LIKE this administration took monetary policy seriously) we are now starting to see Mr Volcker, who is widely respected in the financial community, more often speaking in the public arena:


Interestingly, I posted an interview with Marc Faber some time ago where he mentioned this very fact when asked about who he thought should replace Mr. Bernanke, he mentioned Mr Volcker but he highlighted the fact that, at the time of the interview, Mr. Volcker was kept “in the back” because likely Obama was listening more to Larry Summers and Goldman Sachs than he was to Volcker obviously.

Why is Paul Volcker entering the spotlight now? First off, let’s get some background: Mr. Volcker, who took the unpopular but necessary step to raise interest rates into the mid teens during the 1979-1982 period (which is why some people are still making a killing on 30 year savings bonds purchased at that time – anyone interested in 15% annual returns guaranteed by the government, tax deferred and state tax free? – however, the 30 year term is almost up on many of these bonds as this year, bonds issues in 1980 come due), advocates for separation of traditional banking and proprietary trading (institutions trading their balance sheet assets).

This would be a move back in the direction of Glass-Steagall, when there were walls between banking and brokerage/trading. Interestingly, this might not have been necessary if the Fed, under chairmen Greenspan and Bernanke, hadn’t encouraged the casino atmosphere by keeping rates low, allowing the banks to borrow at almost zero and trade the money wildly. This was fine until it all unwound 2 autumns ago. But I am certain Volcker understands that although prudence would have prevented the bubble and the fall, politicians would never have the courage to tone down enthusiasm and speculation (I offer you Fannie Mae, Freddie Mac, the housing bubble, endless appointments of Goldman Sachs executives to positions in government, etc as proof) as Volcker has ALREADY done in the past. Volcker has guts – raising interest rates doesn’t make lending easy – and it likely didn’t make him popular then – but now, 30 years later, his decisions are looked upon as a very wise policy.

The reason Mr Volcker’s influence is growing in this administration is simple: enough Americans now, thanks to endless efforts to educate them about monetary policy, budget deficits, and the likelihood of government-run programs to cause all kinds of problems, by people such as Ron Paul – oftentimes under great ridicule (Ron Paul regularly was belittled, blasted, or ignored by people on ALL sides – more often republicans and strangely, people with perhaps 1/1000th of a percent of the economic knowledge of Dr Paul), realized that government bailouts, government-run programs, borrowing staggering amounts of money, our future liabilities with Medicare and Social Security, keeping zombie companies alive so they can pay bonuses (apparently there is no ‘higher water mark’ on those bonuses), and encouraging excessive borrowing by banks AND individuals are ALL bad policies and they are rightly fixing the blame on GOVERNMENT. And now Obama is scrambling hard to appear more financially prudent. In 2009, in many speeches, President Obama, who I would want on my debate team any day, spoke the words of financial responsibility – but he continued and expanded the efforts started the previous fall under President Bush to bail out everyone – and then he began blaming banks for making money after rebuilding huge profits off of low Fed rates – but people realized this hypocrisy because this is EXACTLY what government TOLD the banks to do – government said “take the TARP funds, use the low interest rates and REBUILD your balance sheets and return to profitability.” And that’s what they did – so how can Obama blame banks for doing what he (and the hypocrites in Congress) told them to do?

Remember, it’s GOVERNMENT that originally created the casino (low interest ratesĀ  during most of the last decade so AIG/GS/Lehman etc. could play with trillions). How could they do that if the Fed had rates higher? They could not afford to – but thanks to Greenspan and Uncle Ben, they could.

Remember, it’s GOVERNMENT, through their (originally implied) backing of Fannie Mae Loans that ENABLED banks and mortgage companies to loan WITHOUT CONSIDERATION FORĀ  LOAN QUALITY – why worry about who’s borrowing when you can sell the mortgage off to the government? Yes some bad individuals took these loans, and some bad loan officers approved them, but without government backing and encouragement, none of this would be possible.

People are starting to realize now, that government enabled all of this – and when people sounded alarms (think Bernie Madoff – the government was told YEARS AGO that he was up to some funny business), no one listened. Who wanted to stop the party? Volcker would have stopped the party – in fact, it likely would never have become such a big ‘party’ if Volcker were Fed Chairman from 1999-2009.

More color on this topic from:

The Boston Globe -Summers’ Role Questioned