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Paul Volcker is making sense
Friday, October 16, 2009
How many people listen to former Federal Reserve Chairman Paul Volcker these days? Sadly, the answer to that question is probably "far too few", however, that doesn't stop him from speaking his mind as reported by Reuters yesterday.
The enormous amounts of liquidity pumped into the U.S. financial system by the Federal Reserve are not inflationary "at the moment" but will become so at some point, Paul Volcker, the former Fed chairman and a White House adviser, said on Thursday.It's too bad that more powerful voices (and personalities) in the Obama White House have caused Volcker to be largely ignored in recent months.Volcker, now an economic adviser to President Barack Obama, said it was difficult, but necessary, to start draining the billions of dollars in liquidity even while unemployment rates remained high as the U.S. battles out of recession.
"You have to act against what seems like common sense. If you wait, it's too late," Volcker said while answering questions after a speech on financial markets at Harvard University's Kennedy School of Government.
...
Financial markets have not yet fully healed, he said, and the economy remains plagued by structural imbalances that threaten to prevent a sustainable recovery taking hold from the deep recession.
"We have to regain our ability to produce goods. Moving money around does not necessarily provide dinner on the table," Volcker said. "You can't run an economy where the financial sector is making 40 percent of the profits."
ooo
4 comments:
"We have to regain our ability to produce goods. Moving money around does not necessarily provide dinner on the table," Volcker said. "You can't run an economy where the financial sector is making 40 percent of the profits."
I am no Volcker but I have been saying this for a decade. That's why I laugh when they say the weak dollar will boost exports, right, like CORN. We make nothing. And that weak dollar will import inflation because we still have to buy things.
Mr. Volcker = Mr. Obvious
and just a little late in stating his reservations.
Essentially, Fed policy forced Americans to stop producing tradable goods. Instead, they produced non exportable services for each other, and paid each other for the services by borrowing imported goods. The financial sector took a huge commission for facilitating the borrowing.
"Eentially, Fed policy forced Americans to stop producing tradable goods."
My take is that process of not producing tradeable goods is triggered by the nature of American globalization started 2 decades ago.
US business began the mantra of profit maximization at the time when Japan's economic bubble began to deflate around 1990. The idea is to nail Japan when it is down, and to begin the era of privatization to sustain ever more profits. This ideology came from Reagan and the economics of supply-side.
Globalization + profit maximization were realized by outsourcing entire industries and importing the cheap goods back at low cost. It worked like wonders for the first decade. America surged ahead, taking advantage of the newly freed communist countries cheap labor.
The huge profits thus generated powered Wall Street to grand heights during the 1990's. Big 5 investment banks became all-powerful.
However, after the first decade of unfettered laissez-fair money making, something funny happened. The business mantra became a religion, to be worshiped by CEOs and consumers alike. This made it possible to carried out the extreme to an even more extreme.
After 2000, vast amount of imported goods made Wallmart, which in nothing more than a fancy warehouse business, the most admired company. Vast production industries were dismantled. Untold millions of middle class took on debt to sustain the good life. And the vast profits were concentrated into Wall Street. Thus allowing it to buy politicians, change rules, control the Fed, finance unlimited national debt, create ever more leveraged financial products, and made that industry 'master of the universe'. But of course, all they did was to move money around, each time creating even more fake money.
The trouble came when the 'masters' wanted even more than what globalization and corporate profit maximization have given it. It wanted everything, including the all the little bits of crump the subprime fools have.
So now, when all the fake money is gone, profits disappear, middle class drown, we have no industries left to rebuild the kind and amount of exportable goods that can restore health. But we had a most wonderful 2 decades enjoying the great life, without really earning it. We can spend the next two decades trying to pay for it, if the government let us.
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