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: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.
"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.
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.