9/23/12

'Gentle giant' Paul Volcker has too little time left to fix the world - Telegraph

'Gentle giant' Paul Volcker has too little time left to fix the world
Paul Volcker sees the current era of economic and political turmoil as one of the most difficult periods in history.

Paul Volcker at Gleneagles in Perthshire. Mr Volcker once said that the only useful contribution in the past 30 years from financial innovation was the ATM machine. Photo: Chris Watt

By Helia Ebrahimi, Senior City Correspondent

9:30PM BST 23 Sep 2012

It's hard to miss Paul Volcker. At 6ft 7in he is a towering figure, in stature and in reputation. His 50-year career in Washington has seen him serve under five presidents: from John F Kennedy to Richard Nixon, Jimmy Carter, Ronald Regan and, finally, Barack Obama. In a 10-year stint as chairman of the Federal Reserve, he brought inflation to heel in a move that has won him plaudits for taming the 1970s recession. He even has a piece of legislation named after him the "Volcker Rule" that limits banks' ability to trade on their account. But the presidential advisor does have one big regret. Namely that he's not 80 again. If only he was five years younger, he says, he would be better placed to help fix the world, stymied by the greed of bankers, politicians and half-baked financial reform.
telegraph.co.uk/finance//Gentle-giant-Paul-Volcker-has-too-little-time-left-to-fix-the-world.html 1/5

9/23/12

'Gentle giant' Paul Volcker has too little time left to fix the world - Telegraph

"If I was 80 again I would definitely take care of all of this," says Volcker "But I am 85 and a little bit disillusioned now. We are definitely a long way from my happy days as a young idealistic guy who was going to contribute to a happy world. I now understand that is not so easy." Volcker has a habit of roaring into laughter at the moment of his most dejected observations. It is disarming but means that, despite the fierce intellect, he looks exhausted. Not because of age but rather because he has lost some confidence in the system, in politicians, in central bankers and the loose monetary policy that defines our current era. "This is a very difficult period in history, maybe one of our most difficult," says Volcker, who also admits he is even disillusioned with the President and his term in office. "It has been a much more difficult period than he [Obama] had anticipated, that I anticipated, or that anybody anticipated. The divisiveness of the political situation, the divisiveness of Congress, and the ideological differences has made it impossible to get consensus on anything. "But the worse thing is the money in Washington. Inevitably that means I am disappointed that [Obama] couldn't do enough. I am disappointed in the system and how it has become so polarised." Unlike most modern political or financial titans, Volcker's reputation has never been tarnished by scandal. The biggest criticism levelled against him is that he is too old to understand the complex world of financial structured products that he is so keen to regulate. "It is true," he admits. "I don't understand these products. But what I am worried about is that the chief executives at these big banks, or the management teams, don't understand them either. Now, that's a very dangerous problem." In an immortal quote, Volcker once said that the only useful contribution in the past 30 years from financial innovation was the ATM machine. Everything else, he claimed, remained dubious. He uses the example of credit default swaps (CDS) which are used as a type of over-the-counter insurance against debt, being non-existent before 1996. By 2006 there were $60 trillion worth of credit default swaps written to cover just $6 trillion of debt. "That just doesn't make sense," he says. "Over the years, banks have become much more obsessed with trying to make money by trading between themselves. The amount of ingenuity that is put into complicated structured instruments
telegraph.co.uk/finance//Gentle-giant-Paul-Volcker-has-too-little-time-left-to-fix-the-world.html 2/5

9/23/12

'Gentle giant' Paul Volcker has too little time left to fix the world - Telegraph

is just lost energy. There are whole crews of people sitting in back rooms figuring out complex new products to sell to customers that promise to protect them from losses in the stock market over the next million years but which, of course, never do." Volcker questions how much of the Wall Street boom years have actually translated into tangible wealth for wider society in terms of economic productivity and growth in GDP. In the US, he says, the average American household did not have any serious increase in income, despite the rapid expansion of the financial services industry. "My grandson went to do all of that financial engineering stuff," says Volcker, again with a laugh. "I said why are you doing this? Do you really think it is productive or beneficial? He said he did it because his boss told him too. Well, I won't accept the Nuremberg defence." At the moment, the job that Volcker was brought back to do has still not been completed. Much of the regulation penned in 2010, including the "Volcker Rule" has yet to be implemented and market "push-back" on reform has brought even accepted regulation to a standstill. The self-proclaimed "old-school central banker" says he is worried about the momentum for fixing the financial services industry. He says money markets, credit agencies, accounting standards and derivatives remain by and large untouched by reform. "There are a lot of people in the banking world, especially at the big banks, that say forget about it, we're back to normal. Leave us alone. "But there has to be recognition that the job is incomplete. This, after all, is no ordinary recession. This is a recession on top of a complete financial breakdown and it will take a very, very long time to recover." In the US, two years after the introduction of the "Volcker Rule" as part of the Dodd-Frank legislation, the law has still not been finalised. In essence, Volcker's law means banks, whose savings are guaranteed by the Government, are not allowed to make bets on their own account. In the UK, similar incoming regulation from the Vickers Report has a more watered down version that allows banks to "ring-fence" propriety investment divisions. The legislation has missed deadlines and ballooned into a 298-page document, mostly filled with comments and demands from banks and their lawyers.
telegraph.co.uk/finance//Gentle-giant-Paul-Volcker-has-too-little-time-left-to-fix-the-world.html 3/5

9/23/12

'Gentle giant' Paul Volcker has too little time left to fix the world - Telegraph

The concern from the banking industry is that the rules will curtail even the most basic market making, drying up liquidity and damaging corporate growth. If you are a market maker, you have to buy the product you are creating a market in. Under Volcker it is possible but you then have to dump that product within a defined time otherwise it is considered to be owned by the bank. What the banks want is a alpha-to-omega description of what is and what is not allowed. Supporters of Volcker say that the principle is important and if you defined every trade then banks would eventually find innovative ways of getting round them. "The idea that the world is going to collapse because the banks can't do speculative trading is nonsense. They can still make markets. "The lobbyists and the lawyers say you have to label everything but that's rubbish. My view on proprietary trading is that, if the chief executives of these banks think they know what is going on, then they ought to be perfectly placed to control it. If they don't like it they should stop being banks and become hedge funds. That's fine. They are then not guaranteed by taxpayer funds. If Goldman Sachs gives up its banking license it can do anything it wants to do. "There comes a time when a little bit of discipline is necessary," says Volcker, now moving from banking reform to wider macro economic monetary policy. The current economic thinking by central bankers, including at the Fed, is to prop up the system through buying government bonds or assets as well as keeping interest rates low. This somewhat flies in the face of Volcker's tough approach to monetary policy. When he was chairman of the Fed he hiked up interest rates, which sparked the 1979 recession, leaving many unable to pay for their homes. It was a controversial and unpopular policy but Volcker knew the medicine had to be painful to work. There were demonstrations every day in front of the Fed building in Washington by groups ranging from home buyers to car dealers. But it worked. The devastation wrought by inflation was kept at bay and the 12.1pc inflation rate of October 1979 had fallen to its lowest level in two decades by 1986. In that period Jimmy Carter was replaced by Ronald Regan, who kept Volcker at the Fed despite being a Republican. A decade before, Volcker helped persuade "Tricky Dick" Nixon to sever the
telegraph.co.uk/finance//Gentle-giant-Paul-Volcker-has-too-little-time-left-to-fix-the-world.html 4/5

9/23/12

'Gentle giant' Paul Volcker has too little time left to fix the world - Telegraph

link between the American dollar and gold, which ushered in the more sustainable world of floating currencies. "When I started my career, Bretton Woods was like a religion $35 an ounce was a religion," Volcker says. "No one could conceive that it would be broken, but once you realised, there is never any going back." In today's market, Volcker says that QE and low interest rates are "understandable" but that they will not "fix the problem" and that people should be aware of the dangers. "There won't be inflation this year or next not the dangerous kind. The real question about loose monetary policy is, can you [central bankers] reverse it in time? That is always the biggest problem in central banking when to tighten up to make sure that you make the policy decision in time. "I think there has been a great neglect of an ordered international monetary system. When you look back you ask how much of this crisis developed because of the huge imbalance between the United States and China. It is amazing that there was no-one in place to blow the whistle. China was very happy to take over the manufacturing industry and they were very happy to lend us money for nothing practically. We were very happy to build houses. But those trends were unsustainable. "You can make the same argument within Europe. They created the euro without a system to combat the disequilibrium until it imploded. There was no discipline in the system." Volcker still believes in the euro and hopes further political integration will strengthen the economic tie. "My belief in the euro is another indication of my navete, I expect," says Volcker, conscious that his long term support for the single currency shows him slightly out of date with current economic thinking. But the man nicknamed the "gentle giant" says he is well versed in long-term thinking. "There is a will to make things better. I have to hope that can come through. Sometimes we need time. Time, time."

Copyright of Telegraph Media Group Limited 2012

telegraph.co.uk/finance//Gentle-giant-Paul-Volcker-has-too-little-time-left-to-fix-the-world.html

5/5