Economic mess gets messier?

October 25, 2009 5:33 AM

Looks like Paul Volkeris attempting to bring some sanity back to the U.S. banking industry, as adviser to the Obama administration. But is anybody listening?
posted by GreyFoxVT (29 comments total)

I don't think Harry Reid has the 193,412 votes necessary for the Sanity Option.
posted by DU at 6:10 AM on October 25, 2009 [1 favorite]

“The banks are there to serve the public,” Mr. Volcker said, “and that is what they should concentrate on. These other activities create conflicts of interest.

Gee, there's a revolutionary concept. No wonder he's pissing people off, what with those pesky ethics and all.
posted by FelliniBlank at 6:13 AM on October 25, 2009 [4 favorites]

This dispute has been brewing for a while and I was wondering when it was gonna go public; basically we've got Volcker, slayer of the 1980's round of double digit inflation, arguing against Fisher's theories of debt deflation [ .pdf ] as espoused by Bernanke, et al.

For historical perspective, Arthur Burns and William Miller, the 10th and 11th Fed Chiefs respectively, set the stage for the 1980's inflationary explosion. Volcker, of course, extinguished inflation but at a cost - The United States underwent one of the steepest (at the time) post WWII recessions on record.

Volcker has been making the rounds of financial media; couple of cites in FT recently and we saw him about a month ago on Bloomberg TV. He gave a 30 minute interview, (my gosh what a great speaker!!) and he was clearly agitated about what he described as an almost inevitable wave of inflation that would soon engulf the G20.

Curious though, we're just not seeing inflationary fears at present in the US bond market, but, then again, we do know they've been effectively monetizing US Government debt, so that would explain the low yields; there is large agent in the market who is distorting natural forces.

I've got to head out but later I'll post some data I've collected on money flows; very interesting that we're now seeing another throwback to the 80's; "hot money" moving from cash to hard assets e.g., gold, property, even selected equities.

A totally fascinating repeat of the 80's, can stagflation be far off?
posted by Mutant at 6:17 AM on October 25, 2009 [9 favorites]

also: "he could end up being responsible for what would arguably be the single most important piece of economic policy implemented by the Obama administration... If Volcker starts taxing debt as well as equity, that would do wonders for the US fisc, and would reduce the systemic danger that debt poses to the economy. What’s not to love?"

White House advisers are examining whether to curb the corporate tax code’s bias toward raising money from tax-deductible debt issues rather than from stock sales...

Tax experts for decades have bemoaned the tax code’s bias toward debt over equity: Interest on most corporate debt is tax deductible, while dividend payments are not.

“The disparity between debt and equity financing encourages corporations to finance themselves more heavily through borrowing. This leverage in turn increases the financial fragility of the economy, an effect we are seeing quite dramatically today,” Jason Furman, now deputy director of Mr. Obama’s National Economic Council, told a congressional panel last year.

btw, ben bernanke also laid out his (competing) vision of US banking friday...
posted by kliuless at 6:19 AM on October 25, 2009 [1 favorite]

Optimizing the banks to serve the public? That sounds like communism, and being an adviser sounds like a czar. How do we know he's not trying to destroy the economy so that Nobama can expand federal power and mandate that EVERYONE gets gay married to their siblings and/or parents?

GIT 'IM!
posted by mccarty.tim at 6:47 AM on October 25, 2009

This article is pretty much proof that the teabaggers are dead wrong in saying that the "czars" in the White House are basically dictators with unregulated power. The fact that the Obama administration is refusing to implement this guys advice shows that czars really have no power short of advising.

I know everyone here knew that. It's just if you wanted something quick to show your gullible friends to prove the "czar" controversy is totally manufactured bullshit.

In other news, if you Google "czar paranoia," Google suggests searching for "Glenn Beck czars." It's the little things that makes Google great.
posted by mccarty.tim at 7:08 AM on October 25, 2009 [2 favorites]

Obama is like his predecessor and so too the Democrats! They place the guys as advisors who have or had strong connections with the outfits that wrecked the economy, and they continue to be against restoring regulations that might just prevent another economic debacle. Obama, alas, is no FDR and not even a trustbuster like Teddy R. Either he is a typical lawyer, trying to make compromises from all the spectrumn, or he is a black man who does not want to be perceived as an Angry Black man. What has been taken for thoughtful, careful consideration of an issue is beginning to be perceived as a Cuomo-like Hamlet passivity.
posted by Postroad at 7:54 AM on October 25, 2009 [2 favorites]

Postroad: "... or he is a black man who does not want to be perceived as an Angry Black man."

Black men perceived as Angry Black men do not enjoy the kinds of careers that Obama has enjoyed.

Whatever you think of Obama or his career, I don't see how you could dispute that.
posted by Joe Beese at 8:14 AM on October 25, 2009 [1 favorite]

The Obama administration: too anti-regulation for Paul Volker.
posted by jaduncan at 8:15 AM on October 25, 2009

Obama is not percieved as an angry black man...Jesse jackson, Al Sharpton et al are. Obama is reasonable, sweet, nice guy...what I said was that some people account for Obama's seeming passivity as a way to avoid being taken for an angry black man. That view of course is but a view and may be incorrect.
posted by Postroad at 8:57 AM on October 25, 2009

is beginning to be perceived as a Cuomo-like Hamlet passivity.

Using the passive voice in that sentence allows you to evade saying by whom.

I admit for a while there -- let's say mid-August to mid-September, I was beginning to wonder if the guy's infallible sense of the long game might have failed him on health care.

Here we are in late October and that we will get some significant health reform legislation is a virtual certainty; that we will get some form of public option is looking very likely; and that the republicans managed to scream themselves into utter irrelevance on the issue (so that the only constituency that really matters are conservative southern democrats, who will be offered the opportunity to shoot their own feet off any day now) is a dead certainty.

I remember all through the campaign whenever I would get frustrated or fearful that he was going to blow it through non-response or failure to aggress, I'd be proven wrong about the strategic thinking behind the scenes.

Don't get me wrong. I'm expecting action on reigning in the banks and the brokerages and insurance companies with tough regulations, on accounting for Bush-era torture policies, and on getting us out of Iraq and Afghanistan, and if we don't see these things I will be very disappointed in Obama and his administration. But when I look at the rather brilliant arc of the health care debate, which seemed for a long time like a derail in process, I admit that once again I should have been calm and trusted that the guy in charge had his shit together.

Sometimes just pounding on a peg isn't gonna work, but you can work it in if you go slow.

The "angry black man" comment, wtf? Seems irrelevant to this debate. Anyone who sees Barack Obama as an angry, dangerous figure because he's black is already on the marginal fringe, helping to drive the last centrists and the last non-Southerners out of the Republican party. The powers that matter in matters of Fed and tax policy are wearing suits, and don't give a shit about any color other than green.
posted by fourcheesemac at 9:38 AM on October 25, 2009 [13 favorites]

Do I have to repeat endlessly? I did not call Obama an angry black man. I said--now see if you can follow this--that some people, wondering why Obama is not more aggressive in policy making but rather given the appearance of being passive, suggest that Obama might be afraid of being termed an angry black man and so is usually rather mild in what he says about any issue. He is certainly not "an angry black man." Nor am I a hate-inspired white guy.
posted by Postroad at 9:43 AM on October 25, 2009

I must've drank too much last night or something. I was half-way through the second link before I actually "got" what this is all about:

Mr. Volcker argues that regulation by itself will not work. Sooner or later, the giants, in pursuit of profits, will get into trouble. The administration should accept this and shield commercial banking from Wall Street’s wild ways.

Hope that's of service to the equally dense.
posted by philip-random at 10:02 AM on October 25, 2009

I remember all through the campaign whenever I would get frustrated or fearful that he (OBAMA) was going to blow it through non-response or failure to aggress, I'd be proven wrong about the strategic thinking behind the scenes.

Hate to come off all optimistic but this certainly speaks to my experience of Obama, the warrior. That is, he and his braintrust seem thus far very good at winning battles without actually having to fire many guns. Which shouldn't be confused with their not having objectives, and not being afraid to move on them.

Most recent case in point: their moves to neutralize FOX news.

The mess that Obama and co inherited took a long, long time to manifest and as such, the only sane way out of it is play it as a long, long game.
posted by philip-random at 10:15 AM on October 25, 2009

I heard you the first time, philip-random. I didn't say you called Obama that, in case you were talking to me. I said I think that it is unlikely Fed and tax policy are particularly influenced by efforts to modulate the reaction of which you speak. Capiche?
posted by fourcheesemac at 10:20 AM on October 25, 2009

Related: Volcker's Quest To Reinstate Glass-Steagall

Fix a broken system? What a novel idea!

[Volker] wants the nation’s banks to be prohibited from owning and trading risky securities, the very practice that got the biggest ones into deep trouble in 2008. And the administration is saying no, it will not separate commercial banking from investment operations.*

If he isn't listened to now, he will go down as yet one more prophet for regulation (Brooksley Born being another) who should have been listened to.
posted by HP LaserJet P10006 at 10:22 AM on October 25, 2009 [1 favorite]

Sorry, I was talking to Postroad. philip-random and I are on the same page about this, I think.
posted by fourcheesemac at 10:25 AM on October 25, 2009

Do I have to repeat endlessly?

No, only until you realize how unbelievably bad it sounds.
posted by Slap*Happy at 10:39 AM on October 25, 2009

Sorry, I was talking to Postroad. philip-random and I are on the same page about this, I think.

confusion is next
posted by philip-random at 10:46 AM on October 25, 2009

I'm going to call bullshit here.

This "bombshell" portrays Volcker as a pro-regulation, pro-government "realist" and Obama as a laissez-faire, in-bed-with-Wall-Street, free market nut. Really? Is there anyone on either side who believes this?

Good cop, bad cop. Now Obama can pretend he is a fiscal moderate, not pro-regulation; pretend that there was never any discussion about nationalizing the banking industry. Pretend none of his campaign rhetoric actually occurred.

I happen to agree entirely with Volcker on this, but whether you are pro- or anti-Obama; whatever you believe about the need for more/less regulation, these kind of media games need to be recognized as the emotional manipulation they are.
posted by obamamustlose at 1:38 PM on October 25, 2009

This "financial crisis" has been a rather large tremor, hey?

I haven't seen wholesale rebuilding using sound earthquake-mitigating practices.

An analogy too far perhaps.
posted by vectr at 2:59 PM on October 25, 2009

Do I have to repeat endlessly? I did not call Obama an angry black man.

You brought the president's race into a discussion that was not about the president's race. Don't be surprised that we take the rest of what you say with a grain of salt, and zero in a little bit on the fact that you brought up the president's race when race wasn't even marginally related to the issue at hand.
posted by hifiparasol at 5:03 PM on October 25, 2009 [2 favorites]

in America, race is always marginally related to the issue at hand
posted by philip-random at 5:13 PM on October 25, 2009 [4 favorites]

This article is pretty much proof that the teabaggers are dead wrong in saying that the "czars" in the White House are basically dictators with unregulated power. The fact that the Obama administration is refusing to implement this guys advice shows that czars really have no power short of advising.

I know everyone here knew that. It's just if you wanted something quick to show your gullible friends to prove the "czar" controversy is totally manufactured bullshit.

No, this article is pretty much proof that one of the "czars" in the White House has no power except for his power to persuade. There are probably other czars who have similarly limited authority. But then there are also other czars with the authority to set limits on executive pay, and with the authority to broker the sale of domestic automotive companies to foreign companies. So you were wrong to extrapolate conclusions about that issue more generally from the story of this one "czar," to the extent that Volcker is a czar in all events.

Maybe the "'czar' controversy" is totally manufactured bullshit, but you cannot prove it from this story. Personally, I think that there are accountability issues that arise when authority for making difficult decisions (official or de facto) is vested in parts of the executive branch over which the President, head of the executive branch, can try to disclaim responsibility. It raises accountability concerns. Not sure that is what is happening now, but not totally manufactured bullshit in my view either.
posted by Slap Factory at 6:16 PM on October 25, 2009

Define "czar" as it applies to a Presidential administration.
posted by dirigibleman at 7:03 PM on October 25, 2009

Personally, I think that there are accountability issues that arise when authority for making difficult decisions (official or de facto) is vested in parts of the executive branch over which the President, head of the executive branch, can try to disclaim responsibility.

Are you saying that any delegation of executive authority is inherently problematic and somehow spooky?

It raises accountability concerns.

How? The executive branch doesn't stop being accountable to voters whether the individual heading it delegates over thousands of people or decides to try to attend to the entire business of execution personally.

not totally manufactured bullshit in my view either.

Maybe there are principled concerns accompanying these questions, and maybe a very few of the people currently making noise about them actually are concerned in a principled manner, and have been banging that drum steadily for decades as this kind of delegation has become more common. But to the extent that these concerns are newly extra-relevant, and especially given the generally non-nuanced presentation and discussion that marks their popular deployment, I should think it is completely clear that they are, in fact, bullshit.
posted by weston at 7:53 PM on October 25, 2009

"Looks like Paul Volker is attempting to bring some sanity back to the U.S. banking industry, as adviser to the Obama administration. But is anybody listening?"

It's too early to tell, frankly.

I see some indications that suggest that the Obama administration do, in fact, plan on being serious about changing the financial world to prevent similar disasters from happening again in the future.

That said, I also see some signs that they're waiting on these plans until the economy is somewhat more recovered before making such decisions, as they're afraid of negatively effecting the overall economy with a rush of new regulations on the financial industry.

We're just beginning to see some moves to regulate, for example. Why now and not day one, if it was judged to be so important?

The answer, to me, seems to be that a judgment was made that the best way for the financial market to be strong again would be to "generously fertilize it" with seemingly endless federal money at first, so as to create the appearance that certain banks were to be considered "too big too fail". This led to investor $$$ moving towards banks that were, in actuality, effectively insolvent at the bottom of the market crash, and only held afloat at the end because investors decided that the major financial institutions -- and the dodgy investments that could potentially submerge them -- were worth, at the very least, what the government would pay for them. (Quite a lot, really.)

In other words, the government did a pretty clever job of manipulating investor sentiment to essentially bail out the financial institutions for them, to a significant degree. This wasn't done by accident, but by design.

So, when you hear words to the effect that this has all been a "massive bailout of rich financiers at the expense of ordinary Americans", it's worthwhile to keep in mind that the "ordinary Americans" didn't face a run on their insolvent banks, with the complete collapse of Bank of America, Citibank... with their creditors and investors being the next likely victims of a growing market contagion.

This is what would've occurred if the Obama administration had counted upon the libertarian myth that markets work perfectly to correct themselves, and that that allowing failed banks to die a Darwinian death is the least expensive option. Indeed, a LOT of economists out there believed this outdated myth... at least until recent events showed that allowing things to run their natural course could lead to a much larger, much more expensive collapse, largely due to investor fear.

So, the markets have been fertilized. There are signs of life again in the markets, but still not a whole lot of evidence of the "green shoots" and "new growth" we'd like to see in order to say "yes, the economy is based on more than just stimulus spending... a real economic rebound is coming."

If you want to know when, psychologically and financially, the safest time for trust busting would be, it's several months *after* we've gotten to that point. Until then, there is a risk that investor confidence would be hurt, which is, frankly, much of what this economic recovery is based upon.

In short, the financial markets *do* work pretty ideally, except in time of extremes, either of fear or exuberance. Rather than simply bemoaning how easy financial institutions have gotten it lately, we should consider the fact that a lot of little people *did* benefit, and that investor and consumer sentiment is *WAY* up, which is an essential for creating the "green shoots" I mentioned.

Add in a bit more liquidity -- essentially a form of stimuli-driven competition for the major financial institutions that will hopefully encourage them to stop sitting on their money and more aggressively pursue small business loans themselves -- and then you have an environment where we might start seeing a recovery *WITH* jobs... possibly 12-30 months away.

Once we're there, *that* would be the ideal time to start trustbusting. Until then, however, it's a risk that could, ironically enough, reduce investor confidence, slow the recovery and cost taxpayers more in the long run.
posted by markkraft at 8:38 PM on October 25, 2009

Slap Factory, are you saying that this Czar doesn't have any power outside of advising, but that his other czars have special power? That boils down to meaning that czars may or may not be an abuse of power, which again makes the controversy meaningless.

And the thing is that Obama or a relevant official member (like the Treasurer or Secretary of State) of his cabinet is still the one who has to approve the czars' ideas, and they still are limited to only what the executive office can carry out.

While you may not like the czars personally, or may dislike their ideas, that still does not make them illegal or contrary to what the founders wanted by virtue of their position. Heads of state have had advisors since time immemorial.

If you dislike the word "czar," blame the media. They chose the term because the Czars in Russia, the leaders before the Bolshevik revolution (which later lead to the USSR, there is no such thing as a "Commie Czar"), were famous for their ability to cut through bureaucracy and push the reforms that modernized Russia from what was practically a feudal nation. Granted, that was because they were effectively dictators, but that does not mean Obama's (or Reagan/Bush/Roosevelt's) advisors are oligarchs. It's simply because they're experts meant to develop reform without bureaucracy. They SUBMIT ideas for the president to APPROVE. If he doesn't like the ideas, they have no power.

Hypothetically, if you were to write the president with an idea and he decided to act upon it, you would have the same amount of power as these czars.
posted by mccarty.tim at 9:11 PM on October 25, 2009

Former Chairman of Citigroup Agrees With Volcker
posted by HP LaserJet P10006 at 7:10 PM on October 27, 2009