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Sep. 17 2009 - 10:28 am | 246 views | 3 recommendations | 20 comments

Will Obama listen to ex-Fed chief Paul Volcker’s warnings?

President Obama talks to Paul Volcker, former chairman of the Federal Reserve, in January 2009 (Pete Souza/White House)

President Obama talks to Paul Volcker, former chairman of the Federal Reserve, in January 2009 (Pete Souza/White House)

Sept. 16 (Bloomberg) — Paul Volcker, the former Federal Reserve chairman who’s an economic adviser to U.S. President Barack Obama, today renewed his call for a limit on the activities of banks that are considered “too big to fail.”

via Volcker Renews Call for Limits on Systemically Important Banks – Bloomberg.com.

So former Fed chief Paul Volcker yesterday was spouting off about how nuts it is that certain “too big to fail” commercial banks that receive mountains of public money are allowed to run around acting like high-risk hedge funds. In a haymaker that seemed to have been designed to land right between the figurative eyes of year-old commercial bank holding companies Goldman Sachs and Morgan Stanley, who have amped up their risk profiles and continued their investment banking businesses basically in unchanged form since their conversions to more “conservative” commercial bank status, Volcker barked:

“I do not think it reasonable that public money — taxpayer money — be indirectly available to support risk-prone capital market activities simply because they are housed within a commercial banking organization,” Volcker, 82, said at a financial conference in Los Angeles.

This would be meaningful if the Economic Recovery Board that Volcker runs for Obama were actually a chief policymaking center for the president. But the reality is that the Volcker group is a kind of show-pony the Obama administration kept on as a way to give consolation jobs to the more progressive economic advisers who led them through the campaign season, people like University of Chicago professor Austan Goolsbee.

If you remember the campaign last year, you probably recall Obama bandying about some pretty good ideas, like a renegotiation of NAFTA and other free trade agreements. Those ideas were Goolsbee’s, and they helped Obama survive his difficulties among blue-collar voters.

It was widely expected that when Obama got elected, he would keep people like Goolsbee close in the White House, but instead they sent him to the Volcker commission –  “Siberia,” as one Democratic aide put it to me the other day — and generally replaced the more progressive campaign team with the money crowd from Wall Street. Meanwhile Karen Kornbluh of the New America Foundation, after being a key Obama aide on econ issues throughout the campaign, was sent packing to Europe until the end of time as an ambassador to the OECD.

The transition was instead led by people like Citigroup’s Bob Rubin, Rubin’s son Jamie, Citi exec Michael Froman (whom you might recall actually accepted a $2.2. million bonus from Citi after he was hired by the White House, and in the middle of Citi’s bailout negotiations), Larry Summers, and Tim Geithner. It’s those people who are running the economic show in the Obama White House.

There is a larger story to be done about how Obama did a bit of a bait-and-switch, hiring progressives to run his campaign and jettisoning them once he got into office. I hear about this phenomenon from different corners of the policymaking universe, from health care to defense and intelligence spending. But my sense is that the switch was most violent in the realm of economic policy, which means stuff like this bears particular attention. Will Obama act on Volcker’s recommendations? We should probably wait and see, but I’m not holding my breath.


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  1. collapse expand

    Of course Obama isn’t going to heed Volcker, not in any truly meaningful way, anyway. Here’s a president who had tons of political capital in February at a time when Americans were calling for Wall Street to be torched. I imagine he could’ve rammed through all kinds of regulatory reform (such as reinstating the part of Glass-Steagall that was repealed by a sneaky sneaky Phil Gramm in 1999)…if he wanted to. But the political will just wasn’t there. Sort of like–and I hate to say it–health care reform.

  2. collapse expand

    Anyone notice that the Price to Earnings ratio on the S&P Index was 128 to 1 at the end of August and is probably up around 140 to 1 now?

    To put that in prospective: the highest it ever got prior to this was 60 on 12/31/2008 and we all remember Q1 of this year when the S&P went into the 600s (currently 1055). The next highest was Q1 of 2002 at 46 . The market then faded 25% after that.

    Normal Bull Market Ratios are 20-30:1 and Bear market PE ratios as low as 7.

    This is a direct result of the Geithner Sumners plan that resulted in FASB dumping Mark to Market (congress put the bug heat on the accounting board ) and letting the Banks Mark-to-Judgment. They changed the rule right as Q1 ended. Less than 10 days later Citibank pre-announced profitability of over 1 Billion.

    The rule allowed the Banks to lower their reserves and release the money into earnings. Which is why the Q1 earnings reports started this market “recovery” to the point where it’s based on noting but govt sanctioned Financial Statement Fraud.

    As banks pile up non-performing assets at a record pace ( 350,000 foreclosures a month) and defaults on credit cards in the teens. They won’t bring foreclosure proceedings much of the time because the public auditors and regulators would get a hint of the actual value of their assets.

    Meanwhile smaller banks are being shut down becuase their small size usually limits them to loans in a small geographic area. That means when they go bad, it is easy for regulators to assess asset value.

    The Too Big To Fail who have gotten much bigger are geographically dispersed to such a degree, it would be difficult to assess how big the lie is . I look at it like this. If they have leverage ratios of 10 to 1 and their assets are overstated by 10%. The Banks are worth nothing , meaning they have no capital

    The Fed has been papering this over which is probably why it objected so fiercely to Bloomberg’s request for the details of the recipients of the 1.5 trillion dollars.

    In a final note: I was not surprised to find out we have 6995 Banks in the country. 1200 Savings Banks and 116 of all those hold 77% of all the Assets. 77% of 13 trillion OR 10 trillion.

    Makes me nervous.

    That’s why Volker is not welcome and Sheila Bair is barely tolerated. Just a guess, but I think the economic team let this get out of hand to such a degree they are hoping that the market revesal and rally will create a wealth effect that will in trun create demand for good and services and HOUSING-

    If that’s the case, dream on. It ain’t gonna happen. Keep in mind the Nasdaq crashed 80% from the Mar 2000 high. The whole time it was crashing we were told to buy on the dips.

  3. collapse expand

    These days it feels like the role of the Democrats is to act as an interim caretaker between periods of Republican dominance. Maybe they right a few egregious wrongs and increase regulatory enforcement, but mostly their job is to keep the government running in a ramshackle ineffective fashion that allows the GOP and its PR minions to build up a new reservoir of public anger at the gubmint and start clamoring for “the adults” to be put back in charge.

    What I can’t quite understand is how people like Obama, who I voted for, see themselves. It’s easy to just toss out the cynical answer that they’re essentially automatons who eat polls and shit popular opinion, but this never seems true when you read contemporary memoirs and histories. Still, if you’re in a room with Paul Volcker, Austan Goolsbee, Larry Summers and Bob Rubin it’s difficult to imagine how, once the Summers/Rubin mantle of gravitas wears off, you can really believe their advice is the proper way to go. You almost have to think that either the echo chamber of consensus cocktail circuit opinion is so strong that these politicians wrongheadedly buy into it or that there’s so much political pressure to keep recycling the same crappy officials and policies that they feel compelled.

    At this point there’s almost no reason to even run a President for the office, since the staff on either side never changes much. Just run a donkey against an elephant for office and show lots of footage of passing drills featuring the ever-present, decades-old executive staff rehashed by each of the parties. Who cares if I vote for Obama or Clinton or Biden or anyone if they’re all going to appoint Larry Summers to the same basic role of economic svengali? I guess at least with Obama I get someone who isn’t painful to listen to when he stands up to tell comforting lies. At least we get a decent reacharound with this guy!

    From everything I can see, Steven Chu and Eric Holder are about the only people worth paying attention to in the entire cabinet and there’s probably something awful going on with them too. Oi.

    • collapse expand

      expat – When a pattern becomes clear through repetition, recognizing it is far beyond a “feeling.” Like you, I still don’t know if the Democrats that are approved as being electable to POTUS are in on the game before the general election or if they only receive their orders after they win.

      However, far from being mere interim caretakers, they are expected to advance the corporate interests and accomplish what eluded their immediate GOP predecessor. It was Clinton that got two of GHB’s agenda items through: NAFTA and reduction in the capital gains taxes. And he didn’t stop there — pushed through more deregulation than Reagan and Bush combined managed.

      Meanwhile, rank and file Democrats are kept distracted by the rightwing corporate rabble-rousers and their Pavlovian loons. Of course in falling for these distractions every time, the left is no less Pavlovian.

      In response to another comment. See in context »
      • collapse expand

        marie, I definitely do not disagree about their pushing forward on a host of lobbied-for corporate fronts – though they also do some good things in that regard (see the missile shield cancellation). Still, their whole purpose these days seems to be not rocking the consensus boat too much. Increase enforcement a bit, re-staff the GOP-gutted permanent bureaucracy and keep their lobbyists happy. Most of all, make sure not to take any irreversible actions in a progressive direction, like, say, granting an entitlement or empowering real regulatory enforcement so that they leave a government in place that’s easy for the GOP to completely stifle once they get back in the captain’s chair.

        Of course as lackluster or corporate or wrong-headed as the Democrats can be, there’s simply no equivalent to staffing the permanent bureaucracy with a bunch of Liberty University and Bob Jones grads and telling them to gut their agency, throw out anyone who reports on science that angers religious supporters, stifle anyone who might interfere with industry and fire any attorneys that aren’t actively prosecuting Democrats.

        In response to another comment. See in context »
  4. collapse expand

    To what extent can this trend be attributed to the influence of surrogates like Rahm Emmanuel? I know it’s too easy an analysis, but it seems like we’ve got more or less the same players we would have had with HRClinton.

  5. collapse expand

    “whom you might recall actually accepted a $2.2. million bonus from Citi after he was hired by the White House”

    Ha. I love it. I’m a federal employee, and we have to disclose assets so they can be evaluated for conflict of interest. If we get a second job we have to tell the higher ups. But I guess if you’re in a fed job that has actual real power, all that concern goes out the window.

  6. collapse expand

    Nor did President Obama pay any attention to Volcker when he advised him to reinstitute Glass-Steagall!

    The surest way to get a handle on what the Obama Administration is about (and this applies to all administrations going back to Jimmy Carter’s) is to study his appointments: Diana Farrell (McKinsey Global Institute, Goldman Sachs), Laura Tyson (Morgan Stanley, NAFTA), Robert Hormats (Goldman Sachs, PetroChina deals), Richard Holbrooke (old Kissinger protege, Perseus), Rahm Emanuel (Wasserstein Perella, and number one hedge fund donation recipient when in congress), Gensler, that asst. sec’y. of treasury and former GS lobbyist, and everyone’s fav Wall Street lobbyists, Geithner and Summers.

  7. collapse expand

    No, it won’t matter, he will be ignored as Larry Summars has marginalized him

    But we can dream together Matt!
    Wrote on the same topic today

    http://www.fundmymutualfund.com/2009/09/paul-volcker-long-way-to-go-for-full-us.html

  8. collapse expand

    Great piece Matt.

    It’s especially good to see the props for Austan Goolsbee. It’s high time someone with your bona fides did this.

    Goolsbee was unfairly judged and dissed by progressives due to a BS kerfuffle with the Hilliary Clinton campaign during the 2008 primaries. But he is the real deal. Forget that he’s a razor sharp economist, stunningly innovative on policy, and a genuinely nice guy. Too little noted is the fact that his bread isn’t buttered by the investment banking set, and so his perspective isn’t warped in the direction of those who already wield outsized power in Washington.

    Most people know about Rubin and his family. Many of your readers will know that Geithner was actually pitched on the CEO spot at Citigroup, and that Larry Summers made 10x his half million dollar Harvard presidency salary consulting for a prominent hedge fund. Austan doesn’t want a job with these plutocrats, and isn’t lunching and playing tennis with them all the time either. And his opinions reflect that.

    Your post reminded me of his June interview with Colbert, at http://www.colbertnation.com/the-colbert-report-videos/230578/june-15-2009/austan-goolsbee . At 1:00 into the clip, he signals how the Summers/Geithner wing of the economic advisors has largely frozen him out.

    After Colbert listed Goolsbee’s titles—“one of the chief economists on the president’s economic-recovery advisory board and a member of the presidential task force on the auto industry”—he asked one of his trademark spot-on “gag” questions: “Who did you piss off to get those jobs?”

    Goolsbee replies: “You have no idea how close to true that is!”

    I’m not so cynical that I doubt that Geithner, Summers and Co genuinely think they are serving the nation. But they need to thanked for their service and go “spend more time with their families”. We desperately need people like Goolsbee in those jobs.

    (And I reckon you’ll agree Matt that it wouldn’t hurt to have guys like zerohedge’s Tyler Durden on hand to advise him RE what really goes down in the banking sector).

    Thanks again for the piece Matt.

    (Full disclosure: I knew Goolsbee a bit growing up, and we’ve chatted briefly over the years. Like most people who’ve been lucky enough to know him, I can’t help but claim bias on his behalf.)

  9. collapse expand

    Volcker’s warnings are more than merely obvious even for the mildly informed. I believe this issue in the current White House (or in any other for that matter) to be less ideological and more rooted in blatant self-serving corruption. Sorry to say Goldman Sachs has weathered this PR storm nicely as they watch their stock price race toward 200 while they find more ways to steal from those who do real productive work. Their P/S (stealings) ratio is over 40, but investors know there is no stopping this juggernaut with all their operatives working their interests from the inside the government. They will get their huge stolen bonuses this year and will complain about having to make their way around aimless unemployed people on their way to their new yacht.

  10. collapse expand

    Matt, you seem to be keeping pretty busy, but that “larger story” to which you allude needs to be published sooner than later.

    Here’s a headline suggestion: “The Scurrilousness of a Thousand Cuts”.

    Don’t forget the DOJ, which apart from some minor relief and judicially-imposed reform has consistently defended and promoted the refried Third Reich jurisprudence and turbocharged Unitary Executive concept implemented by their nefarious predecessor.

    I mean, gee whiz– if Obama & Holder’s Department of Justice wasn’t so fanatically determined to stay clean as Bo’s tooth, and avoid even the appearance of the sordid and malfeasant politicization practiced by the previous maladministration, one might wonder if the DOJ also “jettisoned” promising selections.

    It Dawns on me that it has indeed.

    Please have yourself cloned to connect these dots as comprehensively as you do with the banksters! Thanks.

  11. collapse expand

    I am so disgusted by this kind of crap going on since the election – also the complete dropping the ball on prosecuting the Bushies for their unconstitutional deeds, the wholesale throwing women’s rights under the bus with health care reform, the abandoment of a public health insurance option that I could buy into, the utter spinelessness and capitulation of the Democrats and the administration to the Republicans, so on and so on … so far I am planning on sitting out the elections in 2010 and 2012. Change? What change. There was a massive bait and switch. Obama wanted to be as great a president as FDR? If he continues on this path, he will never come close to FDR or Johnston. He lacks the courage of his convictions and he and his administration are collectively fellating the insurance industry, big pharma, military contractors, Blackwater, AIG, Wall Street, the religious right, you name it …

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