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Paul Volcker was right!

Wednesday, March 05, 2008

It took a little digging, but thanks to Google, blogs, and those few newspaper websites that keep articles hanging around for years, it wasn't that difficult to find Paul Volcker's warning from back in 2004 - a warning that more people should have heeded.

Here we are, seven months into what was thought to be a two-month "credit crunch", and there appears to be little sign of anything getting any better anytime soon. Headlines beginning with the phrase "Another shoe drops ..." now appear with some regularity in financial papers and, while Congress and the White House spar over how to best save the housing market, the Federal Reserve struggles to save the entire financial system.

What did former Fed chairman Paul Volcker say back in the summer of 2004? According to this report in the San Diego Union-Tribune, he said:

"There's a 75 percent chance of a financial crisis in the next 5 years."
Without a doubt, what is upon us now surely qualifies as a crisis and, by the time it's all said and done, "financial crisis" may be too tame a characterization.

What else did Mr. Volcker have to say a few years back?

Coming about eight months later, this post from April 11, 2005 (when my writing style was distinctly different than it is today) offered up a few excerpts from his Washington Post commentary of the day before.
Has his view changed at all in recent months? Well, I guess yesterday's Washington Post article An Economy on Thin Ice answers that question:
"Yet, under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks -- call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it."
Uh ... Paul, this is the second paragraph, and you're like, all gloom and doom already - come on, flip on CNBC or one of those swell Fox business shows, and get with the program. Baby boomers not saving, spending like there's no tomorrow, home ownership as a vehicle for borrowing ... la la la la la la la - I'm not listening.

Now, about half way through, Paul seems to come to his senses a bit:
"Some, such as China, depend heavily on our expanding domestic markets. And for the most part, the central banks of the emerging world have been willing to hold more and more dollars, which are, after all, the closest thing the world has to a truly international currency."
Yes, that's right - we are the hegemon, they need us, they would be nobodies without us - Japan, China, South Korea, and the rest of them. And, this will go on for as long as we say so ... end of story ... you can stop now.
"The difficulty is that this seemingly comfortable pattern can't go on indefinitely ... The clear lesson I draw is that there is a high premium on doing what we can to minimize the risks and to ensure that there is time for orderly adjustment. I'm not suggesting anything unorthodox or arcane. What is required is a willingness to act now -- and next year, and the following year, and to act even when, on the surface, everything seems so placid and favorable. What I am talking about really boils down to the oldest lesson of economic policy: a strong sense of monetary and fiscal discipline."
Well, you've really gone off the deep end now - you should have stopped when you were talking about how great we are compared to those Asian fellas. Not sure where you're going with this - "willingness to act now", "monetary and fiscal discipline"? I've read about this stuff ... just what decade are you from man? Oh, that's right, you're the guy who raised interest rates to about 20% back in the 80's when we had out-of-control oil prices, gas prices, and housing prices, and gold was like $800 an ounce ... uh ... but this is completely different now.
That's weird about the writing style changes - I guess it's a lot more fun to make fun of things when no one really understands that anything is wrong.

When people are losing their homes and both stock and bond investors are losing their shirts, it's just a little too sad to write with such glee.

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donna said...

Oh, to have a real Fed again....

Chuck Ponzi said...

I remember this Volcker speech clearly. It has made many rounds among bubble bloggers. We all knew there were huge imbalances. We all knew there were credit problems. We all knew risk premia were too low. How and when it ended, and what precipitated it were the only things left.

It's like having a 5 year-long drought in SoCal and then 2 week long Santa Anas bring the temp on the coast over 100... it's a tinderbox waiting to burst into flames. Just needed the right spark.

Anonymous said...

Because appointments of members are staggered there are currently only five members on the Fed board.) All current members of the Board of Governors have taken office during the presidency of George W. Bush.

Fed Nominees Pressed on Political Ties
Questions Raised Over Their Service in Administration, but Confirmation Is Likely
By Nell Henderson
Washington Post Staff Writer
Wednesday, February 15, 2006; Page D03

President Bush's decision to elevate three former administration economic advisers to the Federal Reserve Board prompted questions yesterday about whether they would be able to steer the economy independently of the White House they have served.
"This is inevitably going to create the impression that the board is more political than in the past," Schlesinger said. "This creates more of a burden on Bernanke and company to prove they're not taking their cues from [White House Deputy Chief of Staff] Karl Rove."
Warsh, 35, who has served on Bush's National Economic Council for the past four years, is a special assistant to the president for economic policy.

Boo Fed, Collusion! Corruption

Anonymous said...

Bring Volker Back in whatever new administration comes in Nov

Flow5 said...

Volcker ought to know or should have learned from his mistakes. His incompetence with handling the 1979-1983 period superceded Greenspans.

Dave L said...

Re: Volcker's "incompetence" -

It's not easy to root out inflation with monetary policy alone. There were these, whaddaya call them, 'budget deficits' at the time that were pushing policy in the other direction.

You, presumably, would have preferred to bring in someone like Dumbledore to perform the kind of financial wizardry that rises above such mundane considerations.

Anonymous said...

Are you aware of this: Poole is an influential Fed official who voted against the central bank's emergency rate cut of three quarters of a percentage point on January 22. He does not currently sit on the rate-setting Federal Open Market Committee, however, and he is retiring from the Fed shortly after next month's meeting.


As you may recall with my latest heart attack posts related to Warsh, we have a Fed Board with 5, versus 7 members.

Without going back to notes, all 5 have been appointed by Bush and IMHO, Warsh is highly inexperienced, so with Poole retiring......isn't this an Oh My God Moment, having less than 3 members to cover the overload of chaos??

Tim said...

I haven't followed the coming and goings of Fed members that closely - interesting.

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