Paul Volcker was the last US Federal Reserve chairman who believed that a key part of its role was “to take away the punchbowl just when the party starts getting interesting“.
He successfully brought inflation back to single figures during the 1980’s downturn, setting the scene for the major economic recovery that followed.
Now head of President Obama’s Economic Recovery Advisory Board, he is warning that regulators ‘”have not come anywhere close to responding with necessary vigor” to the worst economic crisis in 70 years’.
Volcker bases his argument on the belief that “we need to produce more, finance less“. He also highlights the fact that “some banks have “pervasive conflicts of interest“. And his core argument is that “this isn’t any time to go back to business as usual.”
As Bloomberg notes, Congress took 4 years from the 1929 Crash to enact meaningful banking reform. So it is no surprise that nothing has yet been achieved. Yet since 2007, the 4 largest US banks have got bigger, rather than smaller. They now hold 35% of all US deposits versus 27%. Globally, the world’s top 10 banks hold 26% of assets, versus 18% in 1999.
Similarly, as Barrons notes, the US housing crisis – the core of today’s financial problems – is still unresolved. 1 in every 8 mortgages is now in either foreclosure or delinquent, and foreclosures themselves are forecast to reach 3.9 million in 2009, versus 3.2 million last year. Equally, debt problems continue to raise concern in the eurozone and elsewhere.
The problem is that regulators continue to confuse being market-friendly, with being friendly to markets. Thus they fail to take the difficult steps that would make the financial system safer for its users. The blog believes Volcker when he says “I think I’m probably going to win in the end.” It just hopes that further debt crises aren’t required to finally force regulators to act.