Here is former Fed Chair Paul Volcker on the big question: will consumers, investors and the economy be safer?

“By now it is pretty clear that it was faith in the techniques of modern finance, stoked in part by the apparent huge financial rewards, that enabled the extremes of leverage, the economic imbalances and the pretenses of the credit rating agencies to persist so long,” Mr. Volcker said in this remarkably candid talk.”

-How Mr. Volcker Would Fix It (NYT)

Volcker’s wish list includes further basic reforms: Making capital requirements tough and enforceable; requiring derivatives to be standardized and transparent, and ensuring that auditors are truly independent by rotating them periodically. Last, he wants to shrink the Systemically Dangerous Institutions (SDIs), by reducing their size or curtailing their interconnections or limiting their activities.

In other words, bankers and the market cannot be trusted to self-regulate. Watch for the fools who claim otherwise . . .

Category: Bailouts, Regulation

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.

14 Responses to “QOTD: Volcker on Making the Economy Safer”

  1. Moe says:

    Mr. Volcker still thinks logic has a place in the market…poor guy.

  2. SkepticalOx says:

    “In other words, bankers and the market cannot be trusted to self-regulate. Watch for the fools who claim otherwise . . .”

    Isn’t the expectation that government would bail out these companies a disincentive to properly self-regulate? When you know that even if you fail, big brother is there to help you, why incentive do you have to keep yourself from taking excessive risk?

  3. SkepticalOx says:

    why = what* (typo)

  4. NoKidding says:

    I’ll be a bait-grabbing fool. In the end, most of the current crisis could have happened if existing regulations were followed.

    A few basic regulations, like:
    1) limiting the size of institutions
    2) not allowing banks to be active traders
    3) limitting leverage
    4) mark-to-market quarterly

    would help. We can argue about which ones are the most important, but the more that gets added to the list in terms of item-count and detail, the more built-in conflict and exceptions the lawyers will have to exploit.

    Again, little of this could have happened if existing regulations were followed. Why would anybody believe that new/more regulation will help if we have an unaddressed history of ignoring regulations as soon as they become inconvenient then suspending them when the obvious violations would lead to a market crash.

  5. Moss says:

    Is is clear only to those who deal with truth and facts. Too many with significant vested interests in the existing schemes will never admit as much. Religion is very sticky.

  6. rd says:

    The same people who push for “self-regulation” of markets are usually pretty robust “law-and-order” guys pushing for bigger police forces adn strict laws to prevent murder, mugging etc. However, this has a fundamental logic break-down.

    Society will have a certain percentage of sociopaths and psychopaths in pretty much all strata. The ones in suits are generally more dangerous because they are generally trusted more and so can accomplish more damage. Bernie Madoff negatively impacted many more lives in a bigger way than the typical mugger or pick-pocket on the streets of Manhattan.

    We need to have financial regulatin that matches the rest of our legal system with simple, enforceable rules that generally match social norms. Simple, enforceable capital rules are similar to drunk driving rules – you can’t be allowed to risk highly negative consequences through negligence and incompetence – you are expected to be able to function at a level to generally protect the people around you.

    The self-regulation school of thought would state that drunk driving rules are unnecessary because nobody would risk the massive conseuqences of drunk driving with huge impacts to your insurance as well as the risk of killing or injuring yourself and other people. Yet, we have found that strict drunk driving laws are necessary because people will continue to make stupid decisions and at some point you need to be able to take their keys away, hopefully before they wreck their life and a lot of other people’s lives. Once again, the past decade has shown that in the absence of strict financial regulation, the financial sector will go on a massive drinking while driving binge expecting other people to pay their tab when they have an accident.

  7. zot23 says:

    At this point, I think Volcker exists solely to negate the ability to say, “Who could have foreseen…?” after our entire system/culture/world collapses. He’s just visible enough to not ignore, but too small potatoes to make any lasting change. I’d call him our 21st Century Cassandra if the implications weren’t so depressing.

  8. Moe says:

    NoKidding;

    Amen

  9. budhak0n says:

    Sometimes Wall Street can be so “bad”. Hilarious.

    The bit with Carlos and Mike Moore… then to Santelli was priceless. Much better than anything I’ve seen on Maher lately. Although both are priceless.

    Awesome.

    Screw Volcker. Just signifies a shift in how the game’s played.

  10. joestrummerlives says:

    rd:

    Excellent drunk driving analogy. A keeper.

  11. Equityval says:

    For those that didn’t have time to read the story, here’s the real money quote on the GSEs’ complicity in the mortgage underwriting fiasco of the last cycle:

    “THE other area that cries out for change, Mr. Volcker said, is the nation’s mortgage market, now controlled by Fannie Mae and Freddie Mac, the taxpayer-owned mortgage giants.

    “We simply should not countenance a residential mortgage market, the largest part of our capital market, dominated by so-called government-sponsored enterprises,” Mr. Volcker said in his speech. “The financial breakdown was in fact triggered by extremely lax, government-tolerated underwriting standards, an important ingredient in the housing bubble.”

  12. DeDude says:

    “When you know that even if you fail, big brother is there to help you, why incentive do you have to keep yourself from taking excessive risk”

    It is actually not relevant whether there are someone to bail them out or not. The CEO and other leadership expect to harvest huge sums from the good years of risk taking, and then get out before the house of cards collapse. With the current stock ownership and compensation models the turd will always land on someone else’s lap and those making it will have run off with all the gold before the stench fill the room. Those thinking that letting companies collapse will somehow make businesses act more responsibly are living in the past. The people who get hurt are regular workers and pension funds, not those who created (and could have prevented) the mess.

  13. funkright says:

    “By now it is pretty clear that it was faith in the techniques of modern finance, stoked in part by the apparent huge financial rewards, that enabled the extremes of leverage, the economic imbalances and the pretenses of the credit rating agencies to persist so long,”

    No f*cking way?! Really…?

  14. Jim67545 says:

    Two thoughts: Additional regulation/standards will give regulators benchmarks to use. One of the areas of failure in the past debacle was the seeming inability of regulators (FDIC, State Banking, OCC, etc.) to anticipate the coming problem. I guess, if you don’t know what “too far” means then erecting a fence is a good idea.
    Two examples: 1. Regulators, until near the point where the stuff hit the fan, gauged the health of portfolios by the delinquency/default rates. This is inherently backward looking. So, to them, subprime or HE portfolios didn’t look all that bad because home mortgage loans in general were considered low risk lending. 2. Regulators missed the possibility and ramifications of GSEs and others putting back mortgages to the originator.
    Then something needs to be done to consolidate regulators. It is dangerous, to say the least, to have 50 state banking regulators and 3 or 4 federal regulators auditing financial institutions. Not only has it led to banks “choosing” their regulator (that they perceive as being the most “understanding”) but it puts some financial institutions under the auspices of state banking departments that may be understaffed, staffed with left-overs (after the best staff were lured away by FDIC et al.), poorly trained/led, and overly beholding for their own fiscal survival on audit fees paid by the very banks they regulate. Ineptness also leads to uneven regulation which, when times are good, leads to overly lax regulation and, when times are bad, overly strict.
    So, fences (or limits) need to be erected and those who will implement the regulation need to be reorganized and upgraded.