The marginalization of Paul Volcker

Consistent with the recent theme here, readers are pointed to this fine New York Times piece by Louis Uchitelle on the subject of the ongoing marginalization in the Obama White House of former Fed chairman (the one with his reputation still intact) Paul Volcker, head of the President's Economic Recovery Advisory Board.

Listen to a top economist in the Obama administration describe Paul A. Volcker, the former Federal Reserve chairman who endorsed Mr. Obama early in his election campaign and who stood by his side during the financial crisis.

“The guy’s a giant, he’s a genius, he is a great human being,” said Austan D. Goolsbee, counselor to Mr. Obama since their Chicago days. “Whenever he has advice, the administration is very interested.”

Well, not lately. The aging Mr. Volcker (he is 82) has some advice, deeply felt. He has been offering it in speeches and Congressional testimony, and repeating it to those around the president, most of them young enough to be his children.

He 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.

In some ways, this is similar to what is happening in the U.K. at the moment, where Bank of England chief Mervyn King is at odds with Prime Minister Gordon Brown about major reforms in the banking sector, the elected official feeling the influence of special interests whereas the appointed one does not.

Anyway, it really is a shame. Based on the direction we're currently headed, the crew at FRONTLINE may as well start collecting new footage for a 2010 or 2011 documentary on the next crisis that could have been prevented if officials had heeded warnings being heard today.

A few more excerpts:

Mr. Volcker’s proposal would roll back the nation’s commercial banks to an earlier era, when they were restricted to commercial banking and prohibited from engaging in risky Wall Street activities.

The Obama team, in contrast, would let the giants survive, but would regulate them extensively, so they could not get themselves and the nation into trouble again. While the administration’s proposal languishes, giants like Goldman Sachs have re-engaged in old trading practices, once again earning big profits and planning big bonuses.

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.

“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. They create risks, and if you try to control the risks with supervision, that just creates friction and difficulties” and ultimately fails.

The only viable solution, in the Volcker view, is to break up the giants. JPMorgan Chase would have to give up the trading operations acquired from Bear Stearns. Bank of America and Merrill Lynch would go back to being separate companies. Goldman Sachs could no longer be a bank holding company. It’s a tall order, and to achieve it Congress would have to enact a modern-day version of the 1933 Glass-Steagall Act, which mandated separation.

Hopefully, there will be more debate on the return of Glass-Steagall, however, the way it looks right now, maybe not.

According to Uchitelle, Volcker spends little time in Washington these days and works mostly from his New York office, far away from Larry Summers, Tim Geithner, and Ben Bernanke, none of whom favor reforms that go this far.