Note: I posted this in the cafe yesterday, but after rereading it, I thought it deserved TBP treatment . . .

~~~

Volker Recommendations

~~~

Excerpt:
FINANCIAL REFORM: A Framework for Financial Stability

In July 2008, the Group of Thirty (G30) launched a project on financial reform under the
leadership of a Steering Committee chaired by Paul A. Volcker, with Tommaso Padoa-
Schioppa and Arminio Fraga Neto as its Vice Chairmen. They were supported by other
G30 members who participated in an informal working group. All members (apart from
those with current and prospective national official responsibilities) have had the opportu-
nity to review and discuss preliminary drafts.

The Report is the responsibility of the Steering Committee and reflects broad areas of
agreement among the participating G30 members, who participated in their individual ca-
pacities. The Report does not reflect the official views of those in policymaking positions or
in leadership roles in the private sector. Where there are substantial differences in emphasis
and substance, they are noted in the text.

The G30 undertook this project as the global financial crisis entered its second year.
The analysis has been informed by the extreme events later in 2008, which rocked the very
foundation of the established financial system and which led to unprecedented and massive
government intervention both in the United States and in many other countries to contain a
spreading financial panic.

Category: Bailouts, Credit, Real Estate

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

21 Responses to “Paul Volcker / Group of 30 Report on Reform”

  1. Bruce in Tn says:

    Couple of thoughts about this, the first being how long it will take to get reforms in place..? Any ideas? This means that the banking industry and lobbyists don’t block serious reform from the get-go…

    Meanwhile, CR posts about the massive amount of money the British are now proposing for their bailout this weekend, and I thought this piece about the collapse of industrial production in the US was interesting from Bloomberg today.

    http://www.bloomberg.com/apps/news?pid=20601068&sid=az0oc9RaAUG0&refer=economy

    U.S. Industrial Production Fell 2% in December, Led by Autos

    Christina Romer,who was in the video you posted earlier in the week, is quoted that the economy is “rapidly deteriorating”…thanks for the ability to connect a face and body to her thoughts…

    This still seems to me to be mostly about what I would classify as “trickle down bailouts”…most of the money is going to the structures at the top of the pyramid, and the little guy still must feel he’s not going to do well. So what if the investment bank now functions better? If you see that your house is going to lose another 15% of its value this year, how can you feel stable enough economically to start spending again? And my thoughts that this is global, not regional, have been voiced before.

    Anyway, there are much smarter people than me on capitol hill, they’ll figure it out..

  2. Bruce in Tn says:

    Still slightly off topic, but reform is in the future, and depression is in the present:

    http://www.tribbleagency.com/?p=3598

    Average home price $18,513 – Unemployment rate 21%

    This is the problem with reform…for some it is way too late..

  3. Scott F says:

    If the Volker’s report recommendations become reality, the banking system will return to the rules that emerged from lessons learned from the great depression. Deregulation is dead, at least until another generation comes along that has the lack of foresight, pure naivety about human behavior and the attraction of quick profits, and the inability to control their own compulsive behavior. These recommendations call for far greater international co-operation in regulating not just banks, but also money market accounts (which are recommended to become a new form of a bank, with a floating value, without a fixed $1 value). There is also a call for clearly creating boundaries around the role of GSE’s and the private sector. It implies that the private banking system should not be treading in or competing with the GSE’s in whatever their mandate is.

    This report is a complete slap in the face of the policies, and I would say the politics of Alan Greenspan. The result of these policies and the ready willingness of bank management to chase the golden egg of short term profits has essentially totally decimated the banking system of the U.S. For those who are not paying close attention, the banking system has become nationalized to one degree or another over the past few months. The U.S. now owns very significant and in some cases controlling pieces of almost every major bank in the nation, the countries largest insurance company, Freddie and Fannie, and pieces of just about any regional or small bank that has decided to take TARP funds, or in some cases forced to take TARP funds. It is hard to find a bank, or any company in any part of the financial sector, who in some way does not owe its continued existence to Bush, Obama, Congress and the Federal Reserve Board. The world has learned a very painful lesson—deregulation does not work.

    There are also recommendations that essentially call for international co-operation for preventing bubbles from emerging in the economy. The focus is on systemic risk management, creating transparency in accounting presentations, and at more tacit level having boards with independent members whose focus is not supporting management but making sure banks and other financial orgs are maintaining a focus on business that does not heighten systemic risk, or directly pose a risk to the entire system. It would be these members jobs to have a focus on the larger system, not just the bank. I believe underlying all of this is also a focus on business ethics.

    Recommendation 12 discusses re-defining the mark to market rule which in many ways has been partially responsible for the speed of the collapse of the financial system. I have believed for the past year that we need to redefine the rule which would allow an asset to be more slowly devalued in a rapidly declining market value. This would allow for greater time to raise capital, adjust assets bases, and arrange for various ways to strengthen ones assets to take place. When markets know that the underlying value of the assets of a financial institution are rapidly declining, the market sees blood and attacks the institution. What took years to build, can be destroyed in months, simply because of a short term crisis.

    To put it simply this is a call for re-regulation and an attempt to control what typically happens in any business—the continuing drive for profits and more of them. Anyone with just a passing interest in economic history, knows that most businesses that constantly seek expansion, eventually fail. It may take 15 years or 90 years, but they fail. These recommendations seem to attempt to put constraints on the financial system that reduces risk and enhances their ability to survive, ultimately by putting controls on human behavior that is inclined to keep trying to succeed by taking more and more risk until it fails—like we are seeing unfolding right now. These are historic times. Systemic change is unfolding that will redefine the banking and accounting professions and sectors.

    I believe we are now in a depression. The real rate of unemployment, including those who work part time who would prefer to be working full time or have given up looking for a job, is now most likely between 13 and 16%. Every day we are seeing massive job layoffs by large employers. If current trends continue, the rate of unemployment will accelerate. As more and more people are laid off, they quit consuming, demand continues to drop, and more people loose their jobs. I would not be surprised that if in 2010 to 2011 that the real rate of unemployment is between 20 and 30%. It took a year to recognize that we were in a recession. How long will it take before we call this a depression?

  4. Steve Barry says:

    @bruce:

    WOW…Europe also in a “catastrophe”

    http://news.yahoo.com/s/nm/20090118/bs_nm/us_europe_economy_1

    I have long admired Volcker…dump Geithner and install the tall guy. Give him round the clock servants …clone his DNA….not many, if any, central bankers are cut from his cloth.

    Won’t happen though, so I’ll continue to siphon TARP money into my account.

  5. Steve Barry says:

    Barry,

    I don’t see the favicon for the new site in IE7…getting the default “e”

  6. Hi Barry,

    This is not on topic but I just thought of a great addition to the site that is probably one of the few things lacking. You need to get an options guy in the cafe to give perspective from that angle. I’m an options trader myself so that would be a regular cafe stop for me

  7. constantnormal says:

    I read it — and was disappointed. To be effective regulation, it needs to be very specific, and this read like a lot of “Don’t do bad things”, “Have watchdog agencies watch over things”.

    Looking at our current mess, any proponents of our current way of managing finance (if any will admit to being proponents) would say that we have most of those things already, we have an SEC, a CFTC, yada yada yada.

    It was as if a short, precise document had been washed through a “committee” until it achieved an acceptable level of fuzziness, that all could agree on and implement in their own separate, broken ways, arriving at … pretty much what we have today. But then I suppose that is exactly what happened.

    There were a few things that caught my eye — like the recommendation that money market funds be no longer government guaranteed (obviously unnecessary, and hobbles the actions to the government a bit), and furthermore, that they not be tied to a fixed NAV, but instead be allowed to fluctuate with the value of the fund holdings, effectively a (very) short-term bond fund. I guess that allows money market funds to wiggle a bit more, adjusting in both the dimensions of yield and price as needed. I guess I can see how that makes the system more resilient.

    It remains to be seen exactly what changes are going to be proposed (and silently introduced without fanfare).

  8. constantnormal says:

    Maybe there would arise a market for very short-term closed-end bond funds, with lifetimes of a month or so, that could be traded within the month as a small investor’s alternative to CP, or held to liquidation, as a 30-day CD might be.

    That would not be a bad thing to have.

  9. I can’t completely agree with the Volcker or the Geithner way.

    As the quote of the day sez, “everything the Communists told us about capitalism turned out to be true.”

    Gotta agree with constant normal that:
    >proponents would say that we have most of those things already, we have an SEC, a CFTC, yada yada yada.

    Much of what will get us back on track is psychological:
    http://mast-economy.blogspot.com/2009/01/bull-run-begins-this-week.html
    not more reasoning and “naval gazing.”

  10. wally says:

    Chesley Sullenberger for Fed Chairman.

  11. Steve Barry says:

    Harry Markopolos for SEC Chairman

  12. Steve Barry says:

    @Good News Economist:

    You probably are good at marketing…trying to sell ice cream in a blizzard type of stuff. But your economic analysis is quite shallow. Do you really believe Obama’s oratory and a potentially not horrible LEI report are going to cause a bull run?

  13. Steve Barry says:

    Circuit City is liquidating…34,000 unemployed and massive anchor mall vacancies.

  14. Bruce in Tn says:

    @ Scott F:

    I, too, have come to the conclusion that this is a depression. Good luck to us all.

  15. dunnage says:

    Everywhere in the world you find a bunch Supply Siders hoarding the goods. When you had the Soviet Union the people below these dudes were given communism to live within. In the U.S. the Supply Side gave the folks a taste of laissez- faire. China, anybody wonder why the same 200-300 families run the show.

    Essential the people are dependent upon educating the Supply Side. If the Supply
    Side cannot be convinced that a bigger pie means “a lot more” for them we will be screwed. You cannot enjoy the manna of Supply Side without drinking the kool aid — A lot of them really believe that giving themselves more is for the greater good. If they don’t have $ the problem is systemic. If you don’t have $ it’s cyclical. You know like the “natural rate” of employment. All of it is so reasonable: Of course if everybody that wants to work has a job we got big problems. Tough Love.

  16. Tom K says:

    Obviously if the government is going to guarantee deposits, more/better regulation is necessary. Personally, I’d rather see a system where transparency was mandated and nothing is guaranteed by the government, but hey, in this era of neo-socialism, that’s just a dream.

    The problem I have with document and most of the posts I read here is it’s all rearview thinking. It’s also based on a the belief that the economy is a machine, which can be designed, run, and fixed by a politicians, economists, and bureaucrats:
    http://tcsdaily.com/article.aspx?id=011309A

    And because of the current focus on rearview thinking, nobody’s asking where the next economic crisis is going to come from e.g. What impact will result from trillions of bailouts, stimulus spending, government “investments”? Will the belief that more government (as a percent of GDP) will result in a higher standard of living? “Fairness”? And what is fair anyway?

  17. CaptainNed says:

    Consolidating all banking regulation into one Federal regulator is a very bad idea. Thos would make it far too easy to game the regulator through Congressional influence. Far better to amend the National Bank Act and Home Owners Loan Act to require Federally-chartered entities to comply with State-level consumer protection law. States are far more responsive to the regulatory needs of their citizens and in a much better place to decide what works in their particular state. States were working hard to control the spread of the “liar loan” system through things like rate & fee restrictions and explicit liability running up the securitization chain, among many other ideas, but were put out of action by the Wachovia decision by those Federally-regulated entities who knew that the Fed would never really force them to care about the loans they were making.

    To be completely regulated from above will mean nothing but a race to the bottom of a lowest-common-denominator regulatory scheme, with Congress making the final call.

    I thought so.

  18. scorpio says:

    truly scary that O has not dropped Geithner already (and Axelrod repeating support this weekend). combined w Schapiro at SEC, Gates Clinton et al this does not bode well. Volcker looking more and more like a prop to get O elected as serious stable individual instead of Harvard Law-trained Wall St lackey (the only community getting organized here that i can see is banks investment and commercial and tax-dodgers). Volcker is pre-Greenspan pre-Wall St boom era and that’s just too scary for Summers/Obama to contemplate

  19. Tom K says:

    Listening to all the hypocrits run interference for Geithner is sickening. And I love how the NY Times quotes as many Republicans (supporting Geithner) as possible.

    The SOB took a dependent-care deductions for his kid’s “sleep-away camps”. You see, paying taxes is a patriotic duty for the rest of us, but apparently not for your new Treasury Secretary. Change we can believe in.

  20. benesposito says:

    Well this makes me very optimistic. If only this Group of Thirty had issued a report on derivatives, and their proper use perhaps none of these current problems would have come to be. I mean assuming of course it became the accepted standard text on the subject and was the basis for their mainstream and wide usage. I mean with the wissdom of their members explaining how systems should work that you would end up with proper oversight and regulation. Perhaps then during the clinton years we wouldn’t have had Alan Greenspan, Robert Rubin, and Larry Summers preventing the CFTC from regulating the OTC derivatives market. Oh wait, they did release the report. Greenspan is a former member, and Summers is a current member. Well with Rubin and Summers as Obama advisors, hopefully this banking reform report has the same success their derivatives report did. :|

    http://www.group30.org/pubs/pub_0901.htm
    “The report was commissioned in the 1990s just as the use derivatives grew and began to move into the mainstream of finance, with these new products fundamentally changing financial management by providing new tools to manage risk. It was based on wide ranging survey of the industry.

    At the time many, both inside and outside of the financial industry, were uncomfortable with derivatives activity. They saw it as complex and obscure, potentially subject to abuse that might lead to the failure of individual firms or even to a crisis in the financial system. ”

    http://seekingalpha.com/article/74435-the-subprime-three-rubin-summers-greenspan
    “Greenspan, Summers and Rubin all acted — or failed to act — to enable Wall Street’s quest for higher profits via the opaque OTC market structure model and did so at the expense of the public interest.”

  21. constantnormal says:

    Where is there any emphasis on greater transparency in this report?