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