A Legend of Finance Still Speaks Large: In Looking Back to Earlier Struggles, Paul Volcker Offers Fresh Thoughts on the Impact of Today's Crisis

By Streeter, Bill | ABA Banking Journal, November 2008 | Go to article overview

A Legend of Finance Still Speaks Large: In Looking Back to Earlier Struggles, Paul Volcker Offers Fresh Thoughts on the Impact of Today's Crisis


Streeter, Bill, ABA Banking Journal


In preparing for our interview with Paul Volcker, we came across a comment in a biographical sketch of the former Federal Reserve Board Chairman that said that while excellent at dealing with financial crises, he was less successful in preventing them. When asked about that during the interview he deadpanned, "You wouldn't believe that, would you?" He then said that a regulator can't prevent the tendency of the market to go to extremes, "but you can do your best to moderate them."

That's why he does not agree with former Securities and Exchange Commission Chairman Arthur Levitt, who wrote in The Wall Street Journal, Aug. 5, that "A regulator can never, and should never attempt to, control the animal spirits of the market." Volcker's response: "Part of the responsibility for a regulator is to modify animal spirits either on the exuberance side or on the gloom side. What are you there for?"

Paul Volcker's reputation never diminished after he left office--quite the opposite--although he slipped off the radar to a certain extent. Recently we've heard more than one person say they wish he could play a role in the current crisis. He is involved, just not in an official capacity, at least as of the middle of October. At 81, he is still very well connected, and is chairman of the Regulatory Systems Working Group of the Group of Thirty. The latter is composed of "senior representatives of the private and public sectors and academia." On Oct. 6 the working group issued a comprehensive report on "The Structure of Financial Supervision," which examines in detail the approaches used by 17 countries.

With a bang, not a whimper

Whether or not he takes an official post again, Volcker is not standing on the sidelines.

He delivered a very clear--and strikingly prescient--economic warning in a short speech at Stanford in February 2005. He said:

"Under the placid surface [of positive economic conditions], there are disturbing trends: huge imbalances, disequilibria, risks.... Altogether the circumstances seem to me as dangerous and intractable as any I can remember.... As a nation we are consuming and investing about 6% more than we are producing. What holds it all together is a massive and growing flow of capital from abroad.... The difficulty is that this seemingly comfortable pattern can't go on indefinitely.... I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises...." Now we know.

During the interview he acknowledged that it's difficult for a sitting regulator to change behavior when nothing yet has happened.

"Congress is not very receptive to tough regulation when everything is going well and their constituents are all happily contributing to them and supporting them. They don't want this big, bad regulatory agency making problems for their constituents. Then, of course, when things go bad, they say, 'Why weren't you tougher?'"

Volcker recalled how he had expressed concerns about the expansion of powers granted to federal savings and loans by the Garn-St Germain Act of 1982.

"When I testified before [Sen.] Garn about six months after it passed and expressed those concerns, he'd say, 'Mr. Chairman, have you seen any adverse consequences of this bill?' And I'd say, 'No, sir, I haven't seen any.' When I'd return a year later, he'd say, 'Mr. Chairman, have you seen any adverse consequences of this bill?' And I'd say, 'I'm a little worried, but, no, I can't tell you that I have.' I don't know how many times this went on, but, of course, by the time I was out of office, the answer was, 'Yes, Mr. Chairman, huge'."

The will to see it through

When Paul Volcker was named Fed Chairman by President Carter in 1979, inflation was virulent and the economy was teetering. Once he had secured support within the Fed to break the cycle of inflation, he did so vigorously. …

The rest of this article is only available to active members of Questia

Sign up now for a free, 1-day trial and receive full access to:

  • Questia's entire collection
  • Automatic bibliography creation
  • More helpful research tools like notes, citations, and highlights
  • Ad-free environment

Already a member? Log in now.

Notes for this article

Add a new note
If you are trying to select text to create highlights or citations, remember that you must now click or tap on the first word, and then click or tap on the last word.
One moment ...
Default project is now your active project.
Project items

Items saved from this article

This article has been saved
Highlights (0)
Some of your highlights are legacy items.

Highlights saved before July 30, 2012 will not be displayed on their respective source pages.

You can easily re-create the highlights by opening the book page or article, selecting the text, and clicking “Highlight.”

Citations (0)
Some of your citations are legacy items.

Any citation created before July 30, 2012 will labeled as a “Cited page.” New citations will be saved as cited passages, pages or articles.

We also added the ability to view new citations from your projects or the book or article where you created them.

Notes (0)
Bookmarks (0)

You have no saved items from this article

Project items include:
  • Saved book/article
  • Highlights
  • Quotes/citations
  • Notes
  • Bookmarks
Notes
Cite this article

Cited article

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

(Einhorn, 1992, p. 25)

(Einhorn 25)

1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited article

A Legend of Finance Still Speaks Large: In Looking Back to Earlier Struggles, Paul Volcker Offers Fresh Thoughts on the Impact of Today's Crisis
Settings

Settings

Typeface
Text size Smaller Larger Reset View mode
Search within

Search within this article

Look up

Look up a word

  • Dictionary
  • Thesaurus
Please submit a word or phrase above.
Print this page

Print this page

Why can't I print more than one page at a time?

Full screen

matching results for page

Cited passage

Style
Citations are available only to our active members.
Sign up now to cite pages or passages in MLA, APA and Chicago citation styles.

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn, 1992, p. 25).

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences." (Einhorn 25)

"Portraying himself as an honest, ordinary person helped Lincoln identify with his audiences."1

1. Lois J. Einhorn, Abraham Lincoln, the Orator: Penetrating the Lincoln Legend (Westport, CT: Greenwood Press, 1992), 25, http://www.questia.com/read/27419298.

Cited passage

Thanks for trying Questia!

Please continue trying out our research tools, but please note, full functionality is available only to our active members.

Your work will be lost once you leave this Web page.

For full access in an ad-free environment, sign up now for a FREE, 1-day trial.

Already a member? Log in now.