Notes From Underground: Volcker Finds His Voice

Posted at 12:44 PM (CST) by & filed under Yra Harris.

Dear CIGAs,

We only have one master of the universe in finance now.


Dear CIGAs,

Ex-FED Chairman Paul Volcker delivered a speech on May 29, which served as a ”shofar” blast, warning the FED and its governors to be cautious in possibly undermining the credibility that all central bankers strive to maintain. Mr. Volcker does not doubt the intelligence of Chairman Bernanke  but what he worries about “… is a matter of good judgment, leadership and institutional backbone” (READ THAT AGAIN). ”A willingness to act with conviction in the face of predictable political opposition and substantive debate is, as always a requisite part of a central bank’s DNA.” Now, knee-jerk FED supporters (insert name here) will maintain that is what Bernanke did in presenting QE1, QE2and QE3–but he certainly had the support of a democrat-controlled HOUSE and SENATE in 2010. Also, the White House was a fervent supporter of massive monetary stimulus as he helped keep the economy from sliding into a chaotic state of asset liquidation. The FED may have suffered the barbs of some “tea party” legislators but for the most part the major powers in Washington and Wall Street provided the needed support for theFED.

It is the next paragraph in which Paul Volcker unloads on the current Fed policy makers: “Those are not qualities that can be learned from textbooks. ABSTRACT ECONOMIC MODELING AND THE ENDLESS REGRESSIONS OF ECONOMETRICIANS WILL BE OF LITTLE HELP. THE NEW APPROACH OF ‘BEHAVIORAL’ ECONOMICS ITSELF IS THE RECOGNITION OF THE LIMITATIONS OF MATHEMATICAL APPROACHES, BUT THAT NEW “SCIENCE” IS IN ITS INFANCY” (emphasis mine). Mr. Volcker believes that the ultimate problem is the “dual mandate.” TheFED has been forced to serve two masters and, as a result, it is difficult to achieve a successful outcome. Although  the FED has been hamstrung by the demands of the “dual mandate,” the former chairman does not relieve the FED of its responsibility for the recent and current problems in the economy. Mr. Volcker maintains that the responsibility of any central bank is “… to maintain reasonable price stability–and by extension to concern itself with the stability of financial markets generally.”

The rise of the shadow banking and dynamic financial engineering, which created vast new pools of leveraged liquidity meant that the regulators needed to be ever more vigilant about signs of potential instability. He cites the FED‘s failure to act in a macroprudential capacity to curtail the abuses of the mortgage market. Mr. Volcker’s speech delivered on May 29 at the Economic Club of New York was not a kind review of the FED. Certain talking heads may dismiss Paul Volcker as an old curmudgeon but I find the GIANT’S still-small voice refreshing. It is a horn blast to shake the slumber from the eyes of the complacent. (H/t JA)