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To me, Tall Paul Volcker ought to get a permanent lifetime achievement award for integrity. He didn’t flinch when he got death threats for raising interest rates to 15 percent in the early 80s to break the back of a virulent inflation. When he says the way things ought to be, I pay him heed because I know he has no agenda but the public good. (Revelation of possible conflict: Paul used to be on the board of my television company, where he restricted his role to advising who might or might not be a good guest, and sometimes his secretary, Anka, would supply a phone number. Also, my office mate, Craig Drill, and Paul have occasional weight losing contests. Paul is six-eight and Craig close to six-seven and they have both been known to hit 300 pounds, so the contest is to see who can get to 275, loser to buy dinner).
You would think, after the disaster we had in the nation’s financial system last year, that everyone should pay rapt attention, then, to Volcker. Paul says a bank should be a bank, loaning money to clients. It should not be making bets with units that act like hedge funds. ”Extensive participation in the impersonal, transaction-oriented capital market,” Paul said in a speech in Los Angeles, “does not seem to me an intrinsic part of commercial banking.” In that speech, which I am sure he will repeat before Congress when asked, he said banks should be banned from “sponsoring and capitalizing” hedge funds and private equity firms. Further, strict supervision “with strong capital and collateral requirements should be directed toward limiting proprietary securities and derivatives trading.” Paul is chair of the White House’s Economic Recovery Advisory Board, and he was asked, in Los Angeles, whether his comments were a break with the administration. ”Nothing I said should be a surprise,” he said.
Considering the depths of gloom just a year ago, and how the Fed and the Treasury had to bail out the banks, and how the head of the British banking authority says that a year ago the entire world was less than 24 hours from a slide into a Great Depression, you would think that Paul’s statements border on the obvious.
What is eerie is how quickly people forget, and how eager they are to pretend that nothing really happened. Derivatives never went away, big bets are back, hundred million dollar paychecks are hatching, and what is worse, there seems be the implicit assumption that the government will bail out the system again if there is systemic risk.
I would say if you want to take your own money and borrow 40 to 1 against it, fine. But a public, or even quasi public, institution has no business doing anything remotely like that, because it’s easy to make big bets if you can socialize the risk. That is, if you can hand the bill to the taxpayers and walk off to play again.
