Volcker: A Hell of a Mess in Every Direction
In a recent interview, former Fed Chair Paul Volcker offered up his view we are in a “hell of a mess” a decade after the Committee to Save the Banks made the decision during the acute phase of the Global Financial Contract to rip up the social contract and save the bankers/1%. Unfortunately, his solution to the problems he identifies is to double down on the cause of these problems.
Mr. Volcker began by observing:
We’re in a hell of a mess in every direction. Respect for government, respect for the Supreme Court, respect for the president, it’s all gone. Even respect for the Federal Reserve. And it’s really bad. At least the military still has all the respect. But I don’t know how can you run a democracy when nobody believes in the leadership of the country?
Bravo for a brilliant summary of where we are. This is the direct result of destroying the social contract a decade ago.
He goes on to say:
I’m really worried about this governance thing. There is no force on earth that can stand up effectively, year after year, against the thousands of individuals and hundreds of millions of dollars in the Washington swamp aimed at influencing the legislative and electoral process … The central issue is we’re developing into a plutocracy….. We’ve got an enormous number of enormously rich people that have convinced themselves that they’re rich because they’re smart and constructive. And they don’t like government, and they don’t like to pay taxes.
I agree with Mr. Volcker we face a problem with our plutocracy.
I disagree with Mr. Volcker on the question of whether or not there is a force on earth that can stand up effectively to the money the plutocrats are throwing at Washington to influence the legislative, electoral and regulatory process.
That force has always been transparency. Sunlight is the best disinfectant to the plutocrats’ attempt to capture the government and the process by which it governs.
Unfortunately, Mr. Volcker has historically not been a fan of transparency. Why? It limits how regulators can respond to a bank’s failure.
Under Mr. Volcker’s leadership, the regulators worked behind closed doors to deal with the failure of Continental Illinois. The result of their handiwork according to a Congressional investigation was the original Too Big to Fail bank.
The handling of Continental Illinois also resulted in a series of policy responses that would be used again during the acute phase of the Great Financial Crisis. For example, they extended deposit insurance to cover the previously unsecured wholesale funding. This ended the bank run by these investors. Another policy response was having a financial regulator declare Continental Illinois solvent. In this case, the financial regulator didn’t even bother with the theatrics of a stress test.
Please note, nowhere on the list of policy responses was the idea Continental Illinois and other banks should disclose their current exposure details so the market could confirm they were solvent or viable.
Mr. Volcker’s handling of the collapse of Continental Illinois behind closed doors set the stage for the Committee to Save the Banks to end the social contract. All it took was a new set of regulators led by a former Wall Street banker who were amenable to fixing what the bankers found objectionable about the handling of Continental Illinois’ failure. What did the bankers want changed? They wanted to do away with management losing their jobs and stockholders losing their investment. In short, the bankers wanted an end to the social contract.
Finally, Mr. Volcker said he was worried about the next financial crisis and the banks in particular.
They’re in a stronger position than they were, but the honest answer is I don’t know how much they’re manipulating.
I have always admired Mr. Volcker’s honesty. Of course, he doesn’t know if the banks are actually in a stronger position or not. The reason he and nobody else in the market knows the true condition of the banks is because the banks are still opaque. This is the lasting legacy of his handling of Continental Illinois behind closed doors.
Everybody talks about monetary policy, but the lesson of all this is we need better, stronger supervisory powers.
Hopefully, Mr. Volcker’s call for stronger supervisory powers reflects he is finally ready for transparency in the financial system.
As everyone knows, the strongest form of supervision is the direct result of transparency. When it has access to the information it needs to know what it owns, the market as a whole is far more capable of assessing and exerting discipline on the banks than a segment of the market consisting solely of a handful of bank regulators and examiners.
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