Paul Volcker Speaks out

Chairman Volcker testified in front of Congress. He was on a panel that including Mark Zandi from Moody's Economy.com and Jeffry Miron from Harvard, though it's Volcker that's getting most of the media buzz.

Surprisingly, Volcker gave a sober assessment of the Obama administration's actions thus far, while supporting most of the future policy agenda the administration is pushing. Most negatively, Volcker critiques the current situation by asserting that the "Too Big to Fail" (TBTF) problem continues to exist and will continue into the future. "The danger is that the spread of … moral hazard will make the next crisis bigger,”

Volcker seems resigned to the fact that we will continue to have TBTF and bailouts will occur, but says that best way to deal with this is problem is to split up commercial and investment banks, with commercial banks (by which I assume he means depository institutions) subject to a government safety net but also tighter regulation (trading securities, derivatives), and investment banks exempt from the tighter regulations but not entitled to a government bailout. "The safety net has been extended outside the banking system.... That's what I want to change"

Volcker thinks that the administration should make it more clear that the safety net from the government will only apply to traditional banking institutions.

This sounds an awful lot like a call for bringing Glass-Steagall back, among other things.

On other issues like Consumer Financial Protection Agency, he supports the Administration's plan. Interestingly, he thinks too much is made of issue around executive compensation and was worried about too much "political involvement". My optimistic guess is that Volcker thinks that too much attention is paid to the high levels of compensation, whereas the more critical issue should be around the risks and incentive systems, such as the "deferred blowup" strategies that many traders have implemented.


All in all, lucid testimony from one of the most "blue chip" economic thinkers / leaders. It will be interesting to see how Volcker is able to influence the debate. On the one hand, he is officially the Chair of the President's Economic Recovery Advisory Board (ERAB), but on the other hand, the "inside baseball" story is that he is not involved on a day-to-day basis like Geithner, Summers, Romer, Goolsbee. He has an office but is rarely there. In fact, The ERAB is largely council of outsiders that includes executives, academics, union heads , and other leaders from a cross-section of society, with Austan Goolsbee as the lead staff economist. Most of the board itself is just a part-time group that meet’s periodically. In that sense, Volcker is in many ways an “outsider”, with merely nominal insider status.