Volcker: Financial System Still at Risk
“Normal distribution curves — if I would submit to you — do not exist in financial markets. Its not that they are fat tails, they don’t exist. I keep hearing about fat tails, and Jesus, it’s only supposed to occur every 100 years, and it appears every 10 years.”
-Former Federal Reserve Chairman Paul Volcker
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Real Time Economics reports that former Fed Chair Paul Volcker ditched his prepared remarks at a Federal Reserve of Chicago event yesterday. In its stead, he opened fire on all of the corruption in banking and Wall Street.
It was a “blistering, off-the-cuff critique leveled at nearly every corner of the the US financial system.”
Volcker unloaded on banks and CEOs; he trashed regulators and the inept business schools. He opened fire on the Fed, bombed money-market funds. And while he had good things to say about the financial overhaul law, the bottom line is the system remains at risk.
Rather than subject us to future “judgments” of regulators — all subject to capture by “relentless corporate lobbying by banks and politicians to soften the rules.”
Volcker made a plea for “structural changes in markets and market regulation.”
Real Time Economics noted the following:
Banking: Investment banks became “trading machines instead of investment banks [leading to] encroachment on the territory of commercial banks, and commercial banks encroached on the territory of others in a way that couldn’t easily be managed by the old supervisory system.”
Financial system: “The financial system is broken. We can use that term in late 2008, and I think it’s fair to still use the term unfortunately. We know that parts of it are absolutely broken…”
Business schools: I think that was the general philosophy that markets are efficient and self correcting and we don’t have to worry about them too much.
Central banks and the Fed: “Central banks became…maybe a little too infatuated with their own skills and authority because they found secrets to price stability…I think its fair to say there was a certain neglect of supervisory responsibilities” [nonfeasance]
On procyclicality: “It’s the hardest thing as a regulator in my opinion…when things are really going well, the economy is going well, the market is not disturbed, but you see developments in an institution or in markets that is potentially destabilizing, doing something about it is extremely difficult.
Risk management: “Markets that are prone to excesses in one direction or another are not simply managed under the assumption that we can assume that everybody follows a normal distribution curve.
Derivatives: “I’ve heard so many stories about how important” derivatives are but “there doesn’t seem to be much doubt that the creation of derivatives has far exceeded any pressing need for hedging.”
Money market funds: “Money market funds have encroached so much on the banking market. They are nothing, in my view, but a regulatory arbitrage.
The Fed and Dodd-Frank: Volcker said it was a “miracle” that despite all the criticism aimed at the Fed the central bank “came out with enhanced regulatory authorities rather than reduced regulatory authorities.”
Go read the entire write up, its outstanding.
If this guy was in charge of Fin Reg, the market would be appreciably healthier over the long run. Yet another great missed opportunity . . .
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Source:
Volcker Spares No One in Broad Critique
Damian Paletta
Real Time Economics, September 23, 2010
http://blogs.wsj.com/economics/2010/09/23/volcker-spares-no-one-in-broad-critique/
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September 24th, 2010 at 7:51 am
Volcker’s spot on. Hes too old and too respectable to get tarred for speaking the truth.
September 24th, 2010 at 8:06 am
No kidding! Dodd, Frank and Schumer are all crooks. And where was Obama in all this. He ok’d this bill? So much for change. Republicans are no different. Hell even tea party Brown was in the trough.
This is now us vs. them. Throw them all out. Link below shows how it all went down.
http://www.rollingstone.com/politics/news/17390/188551?RS_show_page=0
John
September 24th, 2010 at 8:28 am
Odd that Volcker comes storming out into the Street, pistols blasting away, after the battle is over …
Perhaps with Larry Summers departing, someone failed to check Paul’s muzzle?
September 24th, 2010 at 8:34 am
any video of this? something to so the kids so they have a role model.
September 24th, 2010 at 8:41 am
BR said: If this guy was in charge of Fin Reg, the market would be appreciably healthier over the long run. Yet another great missed opportunity . . .
I think…….if we had any semblance of truth in the statistics, or faith in the markets…it would be appreciable higher over the long run. Volcker would be a good addition, but I believe there are others who would be more effective. I would like to see a panel of educated people who are not hell bent on strictly carrying out Keynsian philosophies, but a mixture of current economic theory and Autrian economics. Would it solve every problem…of course not. Barry, you could be on that panel, but I think a guy like Karl Denninger would have to be on the panel as well. I am sure you and he disagree quite often, but that is what would make the panel effective.
I have 1 rule…….THERE SHOULD NEVER, EVER BE ANY DISCUSSIONOF ECONOMICS, OR WHAT IS FISCALLY RIGHT FOR THE NATION THAT INVOLVES THE MENTION OR THE SLIGHTEST HINT OF POLITICS. All decisions should be arrived at a-politically.
September 24th, 2010 at 8:43 am
[...] Go to Mr. Volcker’s Speech on Reuters Insider » Go to the Real Time Economics blog of The Wall Street Journal » Go to On Money blog of The Chicago Tribune » Go to Barry Ritholtz’s Big Picture blog » [...]
September 24th, 2010 at 8:57 am
Yes, cranky Paul had a few things to say, but I think we all know the conglomeration of people he was speaking about regard him as the Grandpa Simpson of banking. He managed to get a token regulation put into practice and the real effects over time will probably be about as significant as an arthritic watch dog. Congress, the SEC, and the CFTC gave everything away over the past decade and aren’t in any big hurry to fix anything. Grandpa Paul wandering about and blurting out whatever pops into his mind isn’t going to matter. Corruption is too institutionalized.
September 24th, 2010 at 9:02 am
Sadly ALL decisions made by government are based on politics. Elected officials will choose the option that has the greatest chance of getting them elected again and bureaucrats will choose that which will boost their career the most. Human nature with very few exceptions, Tall Paul for example, prevents any other result. That is why government should be involved as little as possible and at the smallest level where accountability is the greatest. Yes there are some things only government can do but we also must add the waste, fraud, or worse to the cost equation when making the decision.
September 24th, 2010 at 9:09 am
yes yes yes
like volcker i assume everyone who speaks the words fat tail, and “unanticipated risk”
is an igoramus tryin to act like he knows about risk and derivatives. When officials keep saying these things, you can be “sure” that VAR, risk adjusted capital, and Basel rules are nearly useless.
Actually its really not risk at all if you bought overvalued bullshit that should be immediately marked down? thats a fact.
its really not risk at all if you bought “insurance” from someone from someone 30/1 leveraged with no reserves to pay claims or losses. Be as well off buying insurance from a nigerian street vendor
100 year event?
you a big losah!
and nearly certain. the fat tail would be if that worked out.
September 24th, 2010 at 9:13 am
We have a replacement for Summers!
Only 3 “problems”
1. Convince Volker to move from NYC to DC
2. Convince oBummer to offer the position to Volker
3. Make a “Volker” exemption to the ban on smoking in federal buildings. But since oBummer is a marlboro-man himself, perhaps this “Volker exemption” for smoking will be easier to pass than “the Volker rule” for the banks.
September 24th, 2010 at 9:13 am
Gee, I wonder what he thinks of the Donald Trump “Apprentice” show?
September 24th, 2010 at 9:17 am
dead hobo
I prefer to think of Charlie Munger as Grandpa Simpson after his “Suck It Up” performance the other day.
September 24th, 2010 at 9:23 am
Really good of Mr. Volcker to say those things, but the words will largely go unnoticed. I’m sure the Obama camp was briefed on what he had to say, and promptly laughed it off.
I’ve found that listening to people who’ve been to the rodeo before, can help me stay on the bull a little longer. I respect his comments.
September 24th, 2010 at 9:32 am
Only in our current national psychotic episode could speaking simple truths be treated as if some earth-shattering insight had been handed down directly by God or the Devil.
Of course, Volker is correct. Of course, speaking the truth in Americo is heresy — always has been, always will be. Our national psyche can’t handle the truth.
September 24th, 2010 at 9:32 am
““Central banks became…maybe a little too infatuated with their own skills and authority because they found secrets to price stability”
Of all the bullets to me this one is key. The perception that the FED can actually change things that need to happen is very prevalent. IMO events in some situations are bigger that people and will happen albeit via different path. Don’t know if anyone noticed but there is a trade/protectionism war brewing. Wasn’t that a contributor to the great depression and something authorities said they will avoid at all cost?
September 24th, 2010 at 9:37 am
@BennyProfane
Isn’t Charlie Munger more like Mr Potter?
September 24th, 2010 at 9:44 am
it really is remarkable that he is angry.
a level headed promarkets guy 89 year old and emeritus
who has seen it it all
worked with the biggest people handled the then biggist financial crises.
he’s pitchfork angry and so are most here
at the Dark Side holding up reform, so they can blow another big bubble
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BR: Volcker was born in 1927 — he is 83.
September 24th, 2010 at 9:55 am
[...] inside than a former Fed chairman, and he let it absolutely rip. From Real Time Economics (hat tip, Big Picture): Former Federal Reserve Chairman Paul Volcker scrapped a prepared speech he had planned to deliver [...]
September 24th, 2010 at 10:01 am
[...] of our earlier Volcker discussion, consider this classic an indictment of the Business Schools Tall Paul [...]
September 24th, 2010 at 10:28 am
right you are 83 and real angry…
September 24th, 2010 at 10:40 am
Folks — financial “reform” such as it was, has come and gone, and Paul Volcker NOW comes out with his six guns blazing. This strikes be as more of a political performance than any sort of attempt to change things.
What does the Obama administration need most at the moment? Credible experts to focus the public’s attention on the banksters, who are now comfortably safe from any possible legislative changes.
The time for Paul to “get angry” was when hopes of financial reform were being jammed down the toilet by Frank and Dodd, and when Obama signed that legislation instead of vetoing it and sending Congress back to deliver real reforms, he signed on as culpable as well.
Maybe Paul is concerned about his place in history, of inexplicably cherishes his ineffectual role in the administration’s group leading the economic recovery in the wrong direction.
O is looking to shake things up and change the faces, and Paul’s usefulness as a silent figure of respectability has passed. A (politically) logical thing to do would be to send Paul Volcker packing, along with Larry Summers, so he can satisfy people on both sides who are disappointed (for opposite reasons) with the performance of the administration’s task force on fixing the economy. Maybe Volcker figures that this is his last chance to repair his historical image as a spokesman for rationality and fiscal conservatism.
September 24th, 2010 at 11:00 am
It seems as if he looks favorably upon Dodd-Frank (the financial reform)
If so, this is notable as many have roundly criticized it…the criticism has been severe.
Here is my blog post on the subject, containing various quotes:
http://economicgreenfield.blogspot.com/2010/07/finance-reform-bill-few-comments.html
September 24th, 2010 at 11:20 am
Volcker Said “I think its fair to say there was a certain neglect of supervisory responsibilities” [nonfeasance]
”
I love that Volcker dished out some critical words, and there is more than enough blame to go around. wish he would have been more clear about the failures at the Greenspan Fed.
What I would love to hear Volcker say about the Fed:
“I think it is fair to say that by abdicating all supervisory responsibility, Greenspan really Screwed The Pooch”
and then Volcker could go on to say: “and frankly, I am tired of Alan going around and saying there was nothing he could have done to have prevented the crisis; man up Alan!, you screwed the pooch”
September 24th, 2010 at 11:31 am
const…
dont be knockin tall paul
he played the congress/whitehouse game and got as much as he could,
a remarkable amount considering dodd frenk geithner summers kanjorsky around. did he say something diplomatic about dodd frank. Yes he did.
did he like the bill or think it did even 20% of the needed? read his latest
what do you think? of course not.
now, and i personally blame obama for this, Ds all want to suck up to the country club part of planet R for the next 6 weeks.
paul speaking out now is profoundly embarassing to them/you,
So many will try to portray him as the old ineffectual fool. lot of spin goin on above, didnt we all just take the antipartizan pledge?
September 24th, 2010 at 11:53 am
just to be clear obama and the congressional Ds want cred, money and votes from the country club and wall st crowd for doing very little with dodd frank.
or to put it like one of BRs multiple choices “a moderate and judicious approach to regulation”
September 24th, 2010 at 12:04 pm
@constant: Unfortunately my jaded, cynical, been-there-seen-that side of me has to agree with everything you said.
Very sad state of affairs. Beyond dishonest.
oBummer’s former pastor was right: “What do you expect? He’s a politician.”
Change you can believe in????
September 24th, 2010 at 1:04 pm
It was a “blistering, off-the-cuff critique leveled at nearly every corner of the the US financial system.”
I’m guessing Tall Paul is ready to retire to a fishing pond and doesn’t care about kicking over a few chairs on his way out.
September 24th, 2010 at 1:16 pm
whatever his motives, I am one that is happy to see that someone of prominence will continue to keep the issues of the crisis, those who caused it and the fact that the system is still broken in the public eye. Isn’t this the message that we all want to see go to those that are responsible for repairing the damage and for structural changes. The FinReg could have been definitely better, however it is a framework and there are still a lot of rule making and regulatory process to be done.
Too bad we do not have more Paul Volcker types to offset the influence of the lobbyists.
September 24th, 2010 at 2:23 pm
knocking volcker as being too old to have a strong opinion, is asinine. he’s still more clear thinking and level headed than all those other miscreants, starting with geitner and including dodd and the rest of the bunch.
glass steagall worked for over 4 years. why not now?
a tag team of volcker and elizabeth warren would be probably as close as we could get to people trying to what’s right for the country and not for themselves. unfortunately that obama rock is blocking the path with just little dribs and drabs of help. politicos always hinder rather than help the glide path.
September 24th, 2010 at 2:25 pm
glass steagall is 40 years not 4 years is correct.
September 24th, 2010 at 3:21 pm
They need Tall Paul to take over Summers old job. Obama need to remember that internal debate is good.
September 24th, 2010 at 3:30 pm
Who was that fired Volcker and replaced him with Greenspan???? I forget.
September 24th, 2010 at 4:50 pm
“Volcker said it was a “miracle” that despite all the criticism aimed at the Fed the central bank “came out with enhanced regulatory authorities rather than reduced regulatory authorities.”
Miracle? Back to the Durbin comment about “They own the place.”…
The Fr-odd bill was licking the hand that feeds them.
Is Goldman still a commercial bank? Where are their ATMs? Anybody get a free toaster opening a new account with $500.00?
September 24th, 2010 at 5:16 pm
“If this guy was in charge of Fin Reg, the market would be appreciably healthier over the long run. Yet another great missed opportunity . . .”
Amen.
September 24th, 2010 at 7:09 pm
Volker is old, over, and his behavior is 100% counter productive. He dosent AT ALL get it and I hear nothing smarter coming out of his mouth.
Was he saying anything in 2006 and 2007 and 2008 and what should be done? NO! But now he’s some genius?
What an idiot! Truly a fame whore.
September 24th, 2010 at 11:01 pm
Too bad he was pulled out of retirement by Obama just to be ignored.
Volcker for Treasury. Give Geithner a broom and a trash can and tell him to clean up Wall St. He’s too incompetent to clean it up any other way.
Put Stiglitz as head of the NEC.
I mean, what’s Obama got to lose at this point? Aside from a one term recreation of Herbert Hoover’s Presidency.
September 24th, 2010 at 11:22 pm
6) The recession — “It’s so difficult to get out of this recession because of the basic disequilibrium in the real economy.” –Volker
Many, many volumes have been written to this effect on this blog. I like the fact that Volker will say it out loud, in polite society. He just does not seem to be after votes or trophies and it makes him a danger to many currently in power. He is the quintessence of long term.
September 24th, 2010 at 11:36 pm
Here is what Volcker wrote in the Washington Post on April 10, 2005
The U.S. “is skating on increasingly thin ice. [There] are disturbing trends: huge imbalances, disequilibria, risks — call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot.”
September 25th, 2010 at 7:35 pm
If the US government had any backbone and integrity rather than being a sold-out pack of timid corporatist whores, Volcker would be running the Treasury with a free hand.
October 5th, 2010 at 8:10 am
[...] are beyond the reach of regulators. Former Federal Reserve Chairman Paul Volcker explained why in a recent speech to the Federal Reserve of Chicago. Here are his [...]