9/23/12

'Gentle giant' Paul Volcker has too little time left to fix the world -‐‑ Telegraph

'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 most difficult periods in history.

Paul  Volcker  at  Gleneagles  in  Perthshire.  Mr  Volcker  once  said  that  the  only  useful  contribution  in  the  past  30  years from  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.  His 50-­year  career  in  Washington  has  seen  him  serve  under  five  presidents:  from  John  F  Kennedy  to Richard  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  that has  won  him  plaudits  for  taming  the  1970s  recession.  He  even  has  a  piece  of  legislation  named after  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  he was  five  years  younger,  he  says,  he  would  be  better  placed  to  help  fix  the  world,  stymied  by  the greed  of  bankers,  politicians  and  half-­baked  financial  reform.
telegraph.co.uk/finance/…/Gentle-‐‑giant-‐‑Paul-‐‑Volcker-‐‑has-‐‑too-‐‑little-‐‑time-‐‑left-‐‑to-‐‑fix-‐‑the-‐‑world.html 1/5

9/23/12

'Gentle giant' Paul Volcker has too little time left to fix the world -‐‑ Telegraph

"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  guy who  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  is disarming  but  means  that,  despite  the  fierce  intellect,  he  looks  exhausted.  Not  because  of  age  but rather  because  he  has  lost  some  confidence  in  the  system,  in  politicians,  in  central  bankers  and  the loose  monetary  policy  that  defines  our  current  era. "This  is  a  very  difficult  period  in  history,  maybe  one  of  our  most  difficult,"  says  Volcker,  who  also admits  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  by scandal.  The  biggest  criticism  levelled  against  him  is  that  he  is  too  old  to  understand  the  complex world  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  the chief  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  from financial  innovation  was  the  ATM  machine.  Everything  else,  he  claimed,  remained  dubious.  He uses  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,"  he says. "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
telegraph.co.uk/finance/…/Gentle-‐‑giant-‐‑Paul-‐‑Volcker-‐‑has-‐‑too-‐‑little-‐‑time-‐‑left-‐‑to-‐‑fix-‐‑the-‐‑world.html 2/5

9/23/12

'Gentle giant' Paul Volcker has too little time left to fix the world -‐‑ Telegraph

is  just  lost  energy.  There  are  whole  crews  of  people  sitting  in  back  rooms  figuring  out  complex new  products  to  sell  to  customers  that  promise  to  protect  them  from  losses  in  the  stock  market over  the  next  million  years  but  which,  of  course,  never  do." Volcker  questions  how  much  of  the  Wall  Street  boom  years  have  actually  translated  into  tangible wealth  for  wider  society  –  in  terms  of  economic  productivity  and  growth  in  GDP.  In  the  US,  he says,  the  average  American  household  did  not  have  any  serious  increase  in  income,  despite  the rapid  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  and market  "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,  accounting standards  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  about it,  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  long time  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  not allowed  to  make  bets  on  their  own  account.  In  the  UK,  similar  incoming  regulation  from  the Vickers  Report  has  a  more  watered  down  version  that  allows  banks  to  "ring-­fence"  propriety investment  divisions. The  legislation  has  missed  deadlines  and  ballooned  into  a  298-­page  document,  mostly  filled  with comments  and  demands  from  banks  and  their  lawyers.
telegraph.co.uk/finance/…/Gentle-‐‑giant-‐‑Paul-‐‑Volcker-‐‑has-‐‑too-‐‑little-‐‑time-‐‑left-‐‑to-‐‑fix-‐‑the-‐‑world.html 3/5

9/23/12

'Gentle giant' Paul Volcker has too little time left to fix the world -‐‑ Telegraph

The  concern  from  the  banking  industry  is  that  the  rules  will  curtail  even  the  most  basic  market making,  drying  up  liquidity  and  damaging  corporate  growth. If  you  are  a  market  maker,  you  have  to  buy  the  product  you  are  creating  a  market  in.  Under Volcker  it  is  possible  but  you  then  have  to  dump  that  product  within  a  defined  time  otherwise  it  is considered  to  be  owned  by  the  bank. What  the  banks  want  is  a  alpha-­to-­omega  description  of  what  is  and  what  is  not  allowed. Supporters  of  Volcker  say  that  the  principle  is  important  and  if  you  defined  every  trade  then banks  would  eventually  find  innovative  ways  of  getting  round  them. "The  idea  that  the  world  is  going  to  collapse  because  the  banks  can't  do  speculative  trading  is nonsense.  They  can  still  make  markets. "The  lobbyists  and  the  lawyers  say  you  have  to  label  everything  but  that's  rubbish.  My  view  on proprietary  trading  is  that,  if  the  chief  executives  of  these  banks  think  they  know  what  is  going on,  then  they  ought  to  be  perfectly  placed  to  control  it.  If  they  don't  like  it  they  should  stop  being banks  and  become  hedge  funds.  That's  fine.  They  are  then  not  guaranteed  by  taxpayer  funds.  If Goldman  Sachs  gives  up  its  banking  license  it  can  do  anything  it  wants  to  do. "There  comes  a  time  when  a  little  bit  of  discipline  is  necessary,"  says  Volcker,  now  moving  from banking  reform  to  wider  macro  economic  monetary  policy.  The  current  economic  thinking  by central  bankers,  including  at  the  Fed,  is  to  prop  up  the  system  through  buying  government  bonds or  assets  as  well  as  keeping  interest  rates  low.  This  somewhat  flies  in  the  face  of  Volcker's  tough approach  to  monetary  policy. When  he  was  chairman  of  the  Fed  he  hiked  up  interest  rates,  which  sparked  the  1979  recession, leaving  many  unable  to  pay  for  their  homes.  It  was  a  controversial  and  unpopular  policy  but Volcker  knew  the  medicine  had  to  be  painful  to  work. There  were  demonstrations  every  day  in  front  of  the  Fed  building  in  Washington  by  groups ranging  from  home  buyers  to  car  dealers.  But  it  worked.  The  devastation  wrought  by  inflation  was kept  at  bay  and  the  12.1pc  inflation  rate  of  October  1979  had  fallen  to  its  lowest  level  in  two decades  by  1986. In  that  period  Jimmy  Carter  was  replaced  by  Ronald  Regan,  who  kept  Volcker  at  the  Fed  despite being  a  Republican.  A  decade  before,  Volcker  helped  persuade  "Tricky  Dick"  Nixon  to  sever  the
telegraph.co.uk/finance/…/Gentle-‐‑giant-‐‑Paul-‐‑Volcker-‐‑has-‐‑too-‐‑little-‐‑time-‐‑left-‐‑to-‐‑fix-‐‑the-‐‑world.html 4/5

9/23/12

'Gentle giant' Paul Volcker has too little time left to fix the world -‐‑ Telegraph

link  between  the  American  dollar  and  gold,  which  ushered  in  the  more  sustainable  world  of floating  currencies. "When  I  started  my  career,  Bretton  Woods  was  like  a  religion  –  $35  an  ounce  was  a  religion," Volcker  says.  "No  one  could  conceive  that  it  would  be  broken,  but  once  you  realised,  there  is never  any  going  back." In  today's  market,  Volcker  says  that  QE  and  low  interest  rates  are  "understandable"  but  that  they will  not  "fix  the  problem"  and  that  people  should  be  aware  of  the  dangers.  "There  won't  be inflation  this  year  or  next  –  not  the  dangerous  kind.  The  real  question  about  loose  monetary policy  is,  can  you  [central  bankers]  reverse  it  in  time?  That  is  always  the  biggest  problem  in central  banking  –  when  to  tighten  up  to  make  sure  that  you  make  the  policy  decision  in  time. "I  think  there  has  been  a  great  neglect  of  an  ordered  international  monetary  system.  When  you look  back  you  ask  how  much  of  this  crisis  developed  because  of  the  huge  imbalance  between  the United  States  and  China.  It  is  amazing  that  there  was  no-­one  in  place  to  blow  the  whistle.  China was  very  happy  to  take  over  the  manufacturing  industry  and  they  were  very  happy  to  lend  us money  for  nothing  –  practically.  We  were  very  happy  to  build  houses.  But  those  trends  were unsustainable. "You  can  make  the  same  argument  within  Europe.  They  created  the  euro  without  a  system  to combat  the  disequilibrium  until  it  imploded.  There  was  no  discipline  in  the  system." Volcker  still  believes  in  the  euro  and  hopes  further  political  integration  will  strengthen  the economic  tie.  "My  belief  in  the  euro  is  another  indication  of  my  naïvete,  I  expect,"  says  Volcker, conscious  that  his  long  term  support  for  the  single  currency  shows  him  slightly  out  of  date  with current  economic  thinking. But  the  man  nicknamed  the  "gentle  giant"  says  he  is  well  versed  in  long-­term  thinking.  "There  is  a will  to  make  things  better.  I  have  to  hope  that  can  come  through.  Sometimes  we  need  time.  Time, time."

©  Copyright  of  Telegraph  Media  Group  Limited  2012

telegraph.co.uk/finance/…/Gentle-‐‑giant-‐‑Paul-‐‑Volcker-‐‑has-‐‑too-‐‑little-‐‑time-‐‑left-‐‑to-‐‑fix-‐‑the-‐‑world.html

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