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Paul Volcker has too little time left to fix the world - Telegraph”

Paul Volcker has too little time left to fix the world - Telegraph”

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Published by: mattpauls on Sep 24, 2012
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9/23/12'Gentle giant' Paul Volcker has too little time left to fix the world - Telegraph1/5telegraph.co.uk/finance/…/Gentle-giant-Paul-Volcker-has-too-little-time-left-to-fix-the-world.html
'Gentle giant' Paul Volcker has too little time left to fix the world
Paul Volcker sees the current era of economic and political turmoil as one of the mostdifficult periods in history.
Paul Volcker at Gleneagles in Perthshire. Mr Volcker once said that the only useful contribution in the past 30 yearsfrom financial innovation was the ATM machine.
Photo: Chris Watt
By Helia Ebrahimi, Senior City Correspondent
9:30PM BST 23 Sep 2012
It's hard to miss Paul Volcker. At 6ft 7in he is a towering figure, in stature and in reputation. His50-year career in Washington has seen him serve under five presidents: from John F Kennedy toRichard Nixon, Jimmy Carter, Ronald Regan and, finally, Barack Obama.In a 10-year stint as chairman of the Federal Reserve, he brought inflation to heel in a move thathas won him plaudits for taming the 1970s recession. He even has a piece of legislation namedafter him – the "Volcker Rule" – that limits banks' ability to trade on their account.But the presidential advisor does have one big regret. Namely that he's not 80 again. If only hewas five years younger, he says, he would be better placed to help fix the world, stymied by thegreed of bankers, politicians and half-baked financial reform.
 
9/23/12'Gentle giant' Paul Volcker has too little time left to fix the world - Telegraph2/5telegraph.co.uk/finance/…/Gentle-giant-Paul-Volcker-has-too-little-time-left-to-fix-the-world.html
"If I was 80 again I would definitely take care of all of this," says Volcker "But I am 85 and a little bit disillusioned now. We are definitely a long way from my happy days as a young idealistic guywho was going to contribute to a happy world. I now understand that is not so easy."Volcker has a habit of roaring into laughter at the moment of his most dejected observations. It isdisarming but means that, despite the fierce intellect, he looks exhausted. Not because of age butrather because he has lost some confidence in the system, in politicians, in central bankers and theloose monetary policy that defines our current era."This is a very difficult period in history, maybe one of our most difficult," says Volcker, who alsoadmits he is even disillusioned with the President and his term in office."It has been a much more difficult period than he [Obama] had anticipated, that I anticipated, or that anybody anticipated. The divisiveness of the political situation, the divisiveness of Congress,and the ideological differences has made it impossible to get consensus on anything."But the worse thing is the money in Washington. Inevitably that means I am disappointed that[Obama] couldn't do enough. I am disappointed in the system and how it has become so polarised."Unlike most modern political or financial titans, Volcker's reputation has never been tarnished byscandal. The biggest criticism levelled against him is that he is too old to understand the complexworld of financial structured products that he is so keen to regulate."It is true," he admits. "I don't understand these products. But what I am worried about is that thechief executives at these big banks, or the management teams, don't understand them either. Now,that's a very dangerous problem."In an immortal quote, Volcker once said that the only useful contribution in the past 30 years fromfinancial innovation was the ATM machine. Everything else, he claimed, remained dubious. Heuses the example of credit default swaps (CDS) which are used as a type of over-the-counter insurance against debt, being non-existent before 1996. By 2006 there were $60 trillion worth of credit default swaps written to cover just $6 trillion of debt. "That just doesn't make sense," hesays."Over the years, banks have become much more obsessed with trying to make money by trading between themselves. The amount of ingenuity that is put into complicated structured instruments
 
9/23/12'Gentle giant' Paul Volcker has too little time left to fix the world - Telegraph3/5telegraph.co.uk/finance/…/Gentle-giant-Paul-Volcker-has-too-little-time-left-to-fix-the-world.html
is just lost energy. There are whole crews of people sitting in back rooms figuring out complexnew products to sell to customers that promise to protect them from losses in the stock marketover the next million years but which, of course, never do."Volcker questions how much of the Wall Street boom years have actually translated into tangiblewealth for wider society – in terms of economic productivity and growth in GDP. In the US, hesays, the average American household did not have any serious increase in income, despite therapid expansion of the financial services industry."My grandson went to do all of that financial engineering stuff," says Volcker, again with a laugh."I said why are you doing this? Do you really think it is productive or beneficial? He said he did it because his boss told him too. Well, I won't accept the Nuremberg defence."At the moment, the job that Volcker was brought back to do has still not been completed. Much of the regulation penned in 2010, including the "Volcker Rule" has yet to be implemented andmarket "push-back" on reform has brought even accepted regulation to a standstill.The self-proclaimed "old-school central banker" says he is worried about the momentum for fixing the financial services industry. He says money markets, credit agencies, accountingstandards and derivatives remain by and large untouched by reform."There are a lot of people in the banking world, especially at the big banks, that say forget aboutit, we're back to normal. Leave us alone."But there has to be recognition that the job is incomplete. This, after all, is no ordinary recession.This is a recession on top of a complete financial breakdown and it will take a very, very longtime to recover."In the US, two years after the introduction of the "Volcker Rule" as part of the Dodd-Frank legislation, the law has still not been finalised.In essence, Volcker's law means banks, whose savings are guaranteed by the Government, are notallowed to make bets on their own account. In the UK, similar incoming regulation from theVickers Report has a more watered down version that allows banks to "ring-fence" proprietyinvestment divisions.The legislation has missed deadlines and ballooned into a 298-page document, mostly filled withcomments and demands from banks and their lawyers.

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