QOTD: The Spectre of Volcker’s Ghost
By Barry Ritholtz - February 3rd, 2010, 2:00PM
When challenging the former Fed Chair about the Volcker Rule, Sen. Mike Johanns (R., Neb.) learned why Tall Paul is not a man to be trifled with.
The Senator accused Volcker and the White House of trying to add the onto an already confusing proposal. Volcker’s response was utterly classic:
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“I tell you sure as I am sitting here, that if banking institutions are protected by the taxpayer and they are given free reign to speculate, I may not live long enough to see the crisis, but my soul is going to come back and haunt you.”
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Hat tip Real Time Economics
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February 3rd, 2010 at 2:11 pm
hehehehe, You tell em Big Guy. Maybe some of the current senators should look up some retired from the 70′s when he was in his prime. He shoots straight and doesn’t give a crap what you say or think. Only thing missing now is the big cigar, so he could blow some smoke up at them before he left.
February 3rd, 2010 at 2:15 pm
isn’t there a very very easy way to explain why the Volcker rule is, at the very least, woefully inadequate to limit systematic risk: Lehman… Merrill… Bear Stearns… AIG… LTCM… not one of those were banks – and not one of them would have been effected/reigned in by the Volcker rule.
February 3rd, 2010 at 2:17 pm
Sadly I think as far as politicians and bureaucrats go, Volcker may be one in a million.
February 3rd, 2010 at 2:23 pm
Kid D –
It would not have stopped past crisis — but given how much broader the Fed and taxpayer implicit guarantees have become, its prophylactic against the next crisis . . .
February 3rd, 2010 at 2:24 pm
See Paul may be smarter than you think. When the game changed for certain areas where there was much leveraged risk taking that almost took us down, the players need to find another way to make up for what is no longer available . Paul may feel that our financial wizards will do a worldwide Barings bank 2. Something along those lines. So he may not be addressing what happened so much as what he sees on the crash radar. Read Manias Panics and Crashes. Panics are a dime a dozen, it is just people forget quick. BTW MP&C is supposed to be the top book for all to read this year. Ya right, how about the top book to read in 2007, late again !! Cheers
February 3rd, 2010 at 2:32 pm
He is explained them using a one simple sentence still they don’t get it. Top of it, they are trying to ridicule it as a confusion.
February 3rd, 2010 at 2:33 pm
@KidDynamite
Exactly.
The “Volcker Put” is a lot of hot air about possibly preventing something else happening and a patch on the ass of the real source of the failures you mention. And does not correct them.
Volcker’s reputation is far greater than his so-called solution.
February 3rd, 2010 at 2:38 pm
i don’t know, barry… it’s prophylactic against the next crisis coming at a Fed/Taxpayer backstopped bank/depository institution – but it does little/nothing to reign in the real issue: LEVERAGE (systematically crippling leverage – like we saw at the 5 firms i named above) – at non-bank institutions.
February 3rd, 2010 at 2:42 pm
@KD : Well, that’s because leverage is the only thing keeping this sucker from blowing up again.
February 3rd, 2010 at 2:56 pm
We watched Volcker get marginalized once the election was over. KD and Flip, you think he’s got the political clout to start reigning in leverage at non-bank regulations? I believe he’s lucky to have gotten the Volcker Rule out. Now the administration can say they’ve tried something with teeth. Regrettably I believe this to be news cycle grandstanding post Massachusetts and now Volcker will be sent back out to pasture.
The MSM’s lack of outrage at the obstinance and grandstanding by the senators on the committee over the first attempt at any reform is, well, I guess it is to be expected….
February 3rd, 2010 at 2:58 pm
The only question in my mind: Why aren’t more people like Volker in positions of authority?
February 3rd, 2010 at 3:14 pm
Good ol’ Archemedies, with a big enough lever, you can move the world.
February 3rd, 2010 at 3:15 pm
Kid Dynamite: Your examples are informative, and are reinforced by the observation that as soon as the crisis hit, the biggest investment banks fled to the welcome embrace of the status of bank holding companies; while the other big players, such as AIG, Fannie and Freddie, didn’t need even that fig leaf for their bailouts. Charles Gasparino’s latest book (“Sellout”) argues persuasively that Paulson, Bernanke, Geithner et al. were determined to do whatever it took to halt the lurch toward world economic collapse. –So much depends upon the precise meaning of your “inadequate to limit” systemic risk. Only mainstream economists, including proponents of Modern Portfolio Theory (“efficient markets” fantasists), are sufficiently detached from reality to declare systemic risk either nonexistent or eliminable. I think Volcker and the rest of the Obama team regard themselves as pragmatists and as such are trying only to mollify the likely collateral damage of the capitalist economic system that they serve; a system that is by definition fundamentally out of control (“free enterprise,” aka Adam Smith’s “principle of liberty”). Theirs is a difficult balancing act–taken to extremes, safety and profitability become mutually exclusive–and a good case can be made for the thesis that they are toiling at the impossible, trying to be “in control of being out of control,” as the psychologists of addiction put it. (A strong case can be made that capital is addicted to profit, i.e., the endless expansion of capital.) The stewardship problem is exacerbated by the hubris of big capital, which, with the vast political clout that big money buys, exhibits a secular tendency toward excessive risk and leverage; abetted by the conviction that they indeed wield systemic risk, hence are in fact too big to fail. The drama now being played out in the Congress is of course a real-time case in point. Here it is highly instructive that, while the Obama administration is playing the populist card (tough on the banks, etc.), Paul Volcker has already provided bank-friendly loopholes in his famous Volcker Plan. (His NY Times op ed a couple of days back had him waffling both on the size caps for big finance and on the notion of curtailing proprietary trading–in the latter connection he used “limit” instead of “ban,” etc., and admitted that the definition of prop trading is fuzzy. The historical trend is clear, however: Sooner or later big finance gets what it wants. So even in the unlikely event that the toughest of the Volcker strictures are enacted into law, the betting here is that “self-regulation” will eventually triumph, whether through loopholes in the law, revisions of same by suitably groomed Congresspersons, lax enforcement, and so on.
February 3rd, 2010 at 3:21 pm
They’re not doing a good job of explaining that the changes are needed because of GS and others changing to bank holding companies, gaining protected status and access to cheap funds, something they didn’t have before.
From what you see on CNBC you’d think they were changing the status quo.
They’re not. They’re making necessary adjustments to account for what’s happened as a result of the crisis.
February 3rd, 2010 at 3:25 pm
i’ve often thought, it should be mandatory too sit thru the movie platoon, and a documentary on hiroshima before they enact war, now they need to sit thru some documentaries on germany inflation, the fall of the roman empire, etc……………..people in charge are so utterly clueless it becomes more sickening each day
February 3rd, 2010 at 3:25 pm
Sometimes you just got to chop down the cherry tree. It may provide low hanging fruit as well as shade on a hot summer day, but if you let it grow unchecked you get roots popping up all over the place, sucking the life out of everything.
Goerge Washington did it, I think maybe Obama could do it too.
February 3rd, 2010 at 3:29 pm
Why doesn’t Volcker quit? He’s been marginalized. He would have a much stronger voice outside of the administration. What have they got on him?
February 3rd, 2010 at 6:38 pm
BR, do you have a mancrush on Paul Volcker? Its ok, I have one for jack bauer…
February 3rd, 2010 at 6:47 pm
Excellent..the ghost of “BANKquo” enters…. stage left:
“The earth hath bubbles, as the water has,
And these are of them. Whither are they vanish’d? ”
(Macbeth I,3,181)
February 3rd, 2010 at 8:24 pm
I love it, I love it, once again “free reign” exists. The king is dead, long live….
February 3rd, 2010 at 9:02 pm
Interesting interview today on Tech Ticker with Matthew Bishop, U.S. business editor at The Economist.
http://finance.yahoo.com/tech-ticker/%22in-the-lap-of-the-gods%22-volcker-rule-not-dead-yet-matthew-bishop-says-418093.html
Bishop says the Volcker Rule, or some variation thereof, could follow the same path as Sarbanes-Oxley. The post-Enron legislation looked DOA until WorldCom imploded, he recalls. With the 2002 mid-terms approaching, George W. Bush and the Republicans “needed to look tough, and the legislation passed in a few days, with horrible consequences for years.”
February 3rd, 2010 at 9:19 pm
OMG…BR….you gotta listen to this one! Volker is channeling Springsteen/Cash and WVA Hills…”The Long Black Veil”… Those Mountain Folks knew how to CARRY A GRUDE or look for RETRIBUTION FOR WRONGS!
Being a gloomy sort this haunting melody of all the losses of the past decades haunts me…and if Volker is SAYING THIS! WOO HOO! LOL’s…
Seriously…Incredible listen of Brucie (Springsteen) doing “She Walks these Hills in a Long Black Veil.” VOLKER IS IN YOUR FACE about WHAT HE’S GONNA DO! (It was cut from one of his top selling albums…but the Seeger Songs is what it was)
Whatever….this is a lesser known Springsteen and in incredible listen for the “vengeful amonst us.” :D
MUST WATCH!
http://www.youtube.com/watch?v=JkA7PObD-sw
February 3rd, 2010 at 9:20 pm
EDIT: GRUDGE …
February 3rd, 2010 at 9:32 pm
Further in the interview, Bishop says …
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“Volcker’s proposals “are a throwback to an era that’s over,” he says. “We’re in a global economy now and you can’t try to propose these rules in America that make no sense globally.”
Anecdotally, Bishop says Swiss authorities are licking their chops at the idea the Volcker Rule might be adopted in America and some variation in the U.K. as well. “They can see a lot of international capital markets shifting to their much lighter regulatory system.”
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Clearly, that’s the main argument that lead to banking deregulation in the first place.
February 3rd, 2010 at 9:56 pm
Oh, Mr. Volcker, you’ll live three years. That’s all it will take.
February 3rd, 2010 at 10:52 pm
Here’s the real way to defeat any meaningful financial regulations.
http://www.businessinsider.com/frank-luntz-guide-to-killing-financial-reform-2010-2
Amazing.
February 4th, 2010 at 7:10 am
[...] reader pointed me to Joe Weisenthal’s Business Insider article based on a HuffPo piece that was [...]
February 4th, 2010 at 12:49 pm
@Darkness: I fear you are right.