Paul Volcker on a roll

One must conclude Paul Volcker is so dismayed with what is going on under the guise of financial reform, he's giving speeches to seemingly almost anyone who will listen and print it up.

Firstly we have Volcker says Goldman Sachs Trades Should Not get government protection:

The “safety net” provided by the U.S. government “should not be extended beyond the core commercial-banking business. hey can do trading and do anything they want, but then they shouldn’t have access to the safety net.

Volcker is referring to Goldman Sachs immediate approval to be a bank holding company, which in turn gave Goldman Sachs access to super cheap money and TARP funds.

It's clear Volcker wants Glass-Steagall reinstated. Glass-Steagall put a firewall between commercial and investment banking.

Volcker also talked about the structural problems of the U.S. economy, in the same speech:

We have another economic problem which is mixed up in this of too much consumption, too much spending relative to our capacity to invest and to export. It’s involved with the financial crisis but in a way it’s more difficult than the financial crisis because it reflects the basic structure of the economy.

He's dead right on this one. Now useless site Motley Fool name calls Volcker an idiot. Beyond this continual name calling going on (as if we need more distraction considering our government is run by lobbyists), this is their reason:

Volcker may be right about the limited capacity to export, but to suggest that we have too little capacity to invest...If there's anything we can do well, it's to create capacity to invest. Tens of trillions of dollars printed by Bernanke invested for a 3% yield...because all the opportunities yielding 4% have been taken by other trillions of dollars printed by Greenspan. We've just had a crisis when all those tens of trillions of dollars realized that they were chasing diminishing returns. But what the heck...let's free up another ten trillion bucks to be invested into derivative swaps...

Ok, Motley Fool, firstly you are twisting his words. Those dollars are being invested in other economies. Maybe Volcker used the wrong word capacity, but he's talking about directly investments in the real U.S. economy, ya know manufacturing, R&D, infrastructure, U.S. Citizens, whereas your typical investors just pound on emerging economies as the place to pour money....all using the cheap, zero interest rate dollar to do it. So, capacity implies to the U.S. economy, the real one, not derivatives.

Gez, talk about a twist and out of context to what Volcker meant.

Volcker on the stock market run up masking the continuing crisis (via the Wall Street Journal):

The rally in world stock markets from recession loans has brought renewed hopes on Wall Street in the City of London for a return to outlandish bonuses for financial operators and vigorous defense of established vested interests.

Those hopes and positions must not distract us from what needs to be done.

Clearly Volcker is dismayed at how the financial lobbyists are trying to return to business as usual, thwart any meaningful reforms, as if nothing ever happened!

Earlier in the week Volcker rips to shreds these structured finance products (derivatives based on bad mathematical models) and said the best innovation of the last 25 years is the ATM! In a call to wake up, Volcker asks the obvious question, how exactly did these so called innovations help the real economy?

credit default swaps and collateralized debt obligations "took us right to the brink of disaster." Volcker said suggestions for reform, such as strengthening boards, didn't go far enough and that the chances of a board member understanding complex financial products was virtually nil.

The London Times has the most quotes from Volcker:

He said that financial services in the United States had increased its share of value added from 2 per cent to 6.5 per cent, but he asked: “Is that a reflection of your financial innovation, or just a reflection of what you’re paid?

On proving Volcker right, Yves Smith, Naked Capitalism:

As much as that notion might seem intuitively obvious to many readers of this blog, it would take a fair bit of certain to be impossible data gathering to demonstrate it. The beauty of OTC markets is that the information one would need resides with the dealers. They have no reason to give it up, and the regulators haven’t been and continue not to be too keen to go after it. And we are talking such a long period of time that many of the records are long gone.

Why the Obama administration is obviously ignoring the wise words of Volcker, is not beyond me. As long as we have lobbyists writing bills and Larry Summers around, any sane advice will be promptly discounted.

Update: Spiegel interviewed Volcker:

SPIEGEL: You have been clear about your ideas. Do you really believe we have to break up the big banks in order to create a more sustainable financial system?

Volcker: Well, breaking them up is difficult. I would prefer to say, let's just slice them up. I don't want them to get heavily involved in capital market activities so my view is: Hedge funds, no. Equity funds, no. Proprietary trading, no. Trading in commodities, no. And that in itself would reduce the size of the big banks. So you get some reduction in size. Equally important, you make them more manageable and easier to deal with if they do get in trouble.

Could it be that Volcker is over in Europe since this administration will not listen to his sage policy recommendations?

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Amen

Volcker has been the only adult advising this administration. He doing what a good adviser should do - tell like it is not tell what the President wants to hear. Everything he said this past week is true, particularly:

1) Best financial innovation is the ATM

2) Serious structural defects in our economy.

That quote Motley Fool referred to (IMO) Volcker was referring to leverage or being over-leveraged. I got a sense of frustration listening to him.

RebelCapitalist.com - Financial Information for the Rest of Us.

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Sorry don't think so

I re-read all of the links and quotes and I'm pretty certain Volcker is referring to capital investment, not leveraging.

Although I believe Volcker has called for a return to the 12:1 ratios in the past, in this context, he's talking about real economic investments, i.e. capital for manufacturing, for business developments and so on.

Have you noticed those who have lived through the Great Depression are our last sane advisers? I have and it's like all of these people, who really know what they are talking about, are getting serious marginalized...

I feel like I'm in an Aesop's fable where the lessons learned go completely unheeded.

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Bottomline

His overall point was that our economy has serious structural problems that will slow growth. IMO, he is frustrated because he sees it but nothing is being done to address these structural defects.

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right

Well, Volcker is accredited for ending stagflation but this also is credited with creating massive unemployment during that recession. It was insane to get any loan because they were at...well, still below our lovely credit card rates but in the high teens to 20%. These are commercial loans, mortgages at that time.

He also was basically fired by Reagan because he wasn't a "deregulation" guy.

So, hate 'em or love 'em, I'm not sure. I haven't studied that period to see if there was a kinder, gentler way to end stagfaltion.

I think the theory was to dump all of the pain on in one swift move and get it over quickly that drag it out.

But right now he sure is making a hell of a lot of sense. I just updated the post with my theory he's speaking out in Europe because in turn the EU can really put pressure on the United States for real global financial reforms.

due to the free flow of capital, etc. these days, reform does need to be consistent across nation-states....

and since we have a corrupt Congress (Dodd btw is now considered Dead Senator walkin' no way he will win re-election, now if only Barney Frank was in such a situation with his gerrymandered district) plus a "we love Wall Street" overseer during this building debackle, New York Fed chair of that time Tim Geithner, plus our favorite MNC puppet, Larry Summers...

Makes sense Volcker would be talking to other government leaders.

Guy has got a pair, one must say that regardless and so glad he does.

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