I don’t know quite what to make of the Paul Volcker interview published late last week in Business Week. In case you missed it, Business Week published a frank interview of former Federal Reserve Board chairman Paul Volcker with media giant Charlie Rose the day before Christmas Eve. In it, Volcker talked openly of his disillusionment with government, his lack of influence on the President and the prospect for substantive financial reform. The article is only two pages but it goes a long way in lifting the curtain on how economic policy is conducted in Washington.
Tall Paul was unpersuasive
Let me jump right into the most interesting bit first. Business Week quotes the following exchange between Volcker and Rose (with Rose asking questions in bold):
So why haven’t your views prevailed with the Administration?
I wasn’t persuasive enough.How many meetings have you had with the President about this?
Not very many but…the President has heard my arguments a number of times.Has he heard them one on one, where you’ve had an opportunity to say "This, Mr. President, is why you need to make sure that commercial banks…"
That’s not the way the process works.But do you feel like you have had sufficient opportunity with the President to make your case?
Well, what’s sufficient? He’s the President. He decides.You have one of the most powerful and persuasive voices in the global financial conversation.
You flatter everybody. I am one voice in the conversation, and there are others.
This confirms what I have been saying for some time – namely that it’s not as if the President did not hear what Paul Volcker had to say about the best way to deal with this financial crisis and it’s aftermath. He chose not to follow his advice. Last week, just two days before this article appeared I said:
One can only assume that alternative policy solutions were rejected because the Bush and Obama Administrations preferred the solutions they crafted to these.
Clearly, Obama chose to side with Geithner and Summers over Volcker. So, there you have it! Now we know why the Obama Administration has decided to bailout the too big to fail institutions with little or no strings attached and to craft a reform agenda that allows business as usual. The 6’7” octogenarian former Fed Chair was not as persuasive a figure in arguing economic policy as, say, Tim Geithner or Larry Summers were.
As to the rationale behind Obama’s actions (there is always the desire to know why), I must point out Tim Geithner’s revealing quote from Slate again:
I think this really says something important about the president, not about me. The test is whether you have people willing to do the things that are deeply unpopular, deeply hard to understand, knowing that they’re necessary to do and better than the alternatives.
This ‘deeply unpopular’ choice does seem like a pattern – not just on finance but also on health care and the wars in Afghanistan and Iraq.
As I said at the outset, I don’t quite know what to make of Volcker’s revelations. Rather than beat up on Obama as you might expect me to do, I am going to applaud him for allowing his Economic Advisory Board Chairman to be so open about the inner workings in this Administration.
The system in Washington is broken
The second part of what Volcker had to say that I found intriguing was his characterization of politics in Washington.
Here’s the exchange:
You feel strongly that the financial system has got out of whack. Do you think the American political process is capable of fixing it?
The American political process is about as broken as the financial system. Therefore, one has to be a bit skeptical. Just to give you one little example, one unrelated to the financial crisis. Here we are on Dec. 29, almost a year after the Inauguration, and there is no Under Secretary of the Treasury. That should be an important position. How can we run a government in the middle of a financial crisis without doing the ordinary, garden-variety administrative work of filling the relevant agencies? The Treasury is an outstanding example of a broken system, but it’s not the only one.
I think Volcker is diplomatic in pointing to the most innocuous example of dysfunction in Washington. We all know this is an apolitical way of stating what is obvious on more divisive issues like health care, financial reform, and national defense as well. My own view is that we will not see any substantive financial reforms in large part because of this dysfunction. It will take economic collapse to eventually persuade us that change must occur. For now, it is business as usual.
Glass-Steagall
The last part of the interview I would like to highlight is the part on Glass-Steagall. Volcker tells Charlie Rose that the media have not relayed his views on Glass-Steagall accurately. The exchange goes:
So does this mean we should restore Glass-Steagall?
No. That’s a false statement people make about my position. Glass-Steagall basically said banks cannot underwrite corporate securities or deal with corporate securities. But I would let commercial banks do underwriting of corporate customers. So you could argue that what I propose is somewhat in the spirit of Glass-Steagall in making a distinction between capital-market activities and trading activities and banking activities. But it is not specifically going back to Glass-Steagall.Do you think that Congress will see it your way?
Eventually, yes. They need a little more persuasion.
The interesting bit about this exchange is that it leads directly into the part I highlighted first in which Volcker indicates that he has not been persuasive enough with Obama as well. He seems confident his views will “eventually” gain traction, though. He has said so before (see the last paragraph of this Bloomberg article). What does Volcker believe will “eventually” happen to make his views more persuasive?
Source
Paul Volcker: The Lion Lets Loose – Business Week