Paul Volcker: Finance System is ‘Broken’

"This bright new system, this practice in the United States, this
practice in the United Kingdom and elsewhere, has broken down. Growth in the
economy in this decade will be the slowest of any decade since the
Great Depression, right in the middle of all this financial
innovation. It is the most complicated financial crisis I have ever experienced,
and I have experienced a few…

Changes are going to have to be made” to the global financial system."

Paul Volcker, former Federal Reserve Chair, 1979-87


Straight talk from the best former Fed Chairman alive:

Former Federal Reserve Chairman Paul Volcker said the U.S. financial system, dependent upon securitization rather than traditional bank loans, is broken, and may contribute to the weakest expansion since the 1930s…

The former Fed chief projected "a lot” more losses from the collapse in the mortgage-backed debt market, after the more than $500 billion tallied so far, should the U.S., European and Japanese economies fail to pick up. He urged changes in financial regulations, echoing calls among sitting officials and legislators…

Volcker’s comments came after a government report today showed the U.S. unemployment rate rose to a five-year high as the economy lost more jobs than forecast in August. The report underscored concerns that U.S. consumer spending will weaken and push the American economy into a recession.

Fed Chairman Ben S. Bernanke said on Aug. 22 that financial turmoil has "not yet subsided,” and is contributing to weaker growth and higher unemployment. Policy makers will "continue to review” the Fed’s measures to ensure liquidity to determine "if they are having their intended effects,” Bernanke said.

Banks three decades ago accounted for about 60 percent of U.S. credit; that later declined to about 30 percent as securitization — where financial firms package assets into bonds and other instruments and sell them on to investors and other companies — spread.

I don’t expect to hear such talk from anyone currently associated with the Fed, but its still refreshing to hear blunt honest talk occasionally . . .



Volcker Says Finance System `Broken,’ Losses May Rise
Doug Alexander and Steve Matthews
Bloomberg, Sept. 5 2008

What's been said:

Discussions found on the web:
  1. CNBC Sucks commented on Sep 5

    Paul Volcker was a hero of mine until he endorsed Barack Obama. Volcker had set the standard for a Fed that was independent of political objectives and paved the way for decades of prosperity – while nearly sinking Reagan’s first term – with his interest rate hikes to defeat inflation. A few months ago I wondered, what the hell is Paul Volcker doing endorsing Barack Obama? Well, now that I not only support Obama but even switched political parties permanently, I can happily say that Paul Volcker is a far more intelligent man than even me.

  2. Joe Klein’s conscience commented on Sep 5

    CNBC Sucks:
    Do you really think McCain has a plan for the economy? He doesn’t and Volcker knows it. By the way, CNBC must be giddy with delight today. The unemployment rates jumpes almost a half of a percent and the market ends up 40? WTF?!?!?

  3. JustinTheSkeptic commented on Sep 5

    We’ve finally hit bottom. I’m in on the long side big time! No looooking back…we had capitulation today the world is our oyster America! lol

  4. jtil commented on Sep 5

    Damning commentary indeed. I’ll start stocking the pantry with canned goods…

  5. Clint Athey commented on Sep 5

    Mr. Ritholtz,

    Great coverage as usual. My only comment is that I keep coming back to the issue that the problem isn’t securitization in and of itself. The real problem is leverage. After all, in a fractional reserve banking system, whether the lender is a traditional bank or a hedge fund, either the money is there or it isn’t–i.e. leverage. Thanks for your great site-Barry!


  6. CNBC Sucks commented on Sep 5

    Joe Klein’s conscience – read my comment again and maybe even visit my blog. I think you misread. Anyone who has seen my comments here knows I am an Obama fanboy and hate CNBC so much, I can no longer watch it.

  7. Jeff M. commented on Sep 5

    On cue from WSJ:

    The Treasury Department is close to finalizing a plan to help shore up mortgage giants Fannie Mae and Freddie Mac, according to people familiar with the matter. Precise details of Treasury’s plan couldn’t be learned. The plan is expected to involve a creative use of Treasury’s new authority to make a capital injection into the beleaguered giants. The plan includes changes to senior management at both companies, according to a person familiar with the plans. An announcement could come as early as this weekend.

  8. Jeff M. commented on Sep 5

    I just love the term “creative use” – of Treasury’s new authority to make a capital injection into the beleaguered giants. What that might entail, pray tell?

    No wonder why the markets weren’t crushed today.

  9. VennData commented on Sep 5

    Why Reagan dumped the Carter nominee, Paul Volker for that simpleton Greenspan is beyond me.

    CNBCSucks, Volker is and always was a Democrat, you’re just seeing too many pictures of Reagan and Volker sitting together on the WSJ opinion page. More Reagan myth-making by the GOP media machine.

  10. Tarzan commented on Sep 5

    The real Reagan legacy: turning Paul Volcker out and bringing that putz Greenspan in.

  11. donna commented on Sep 5

    Supply side works — we just need a bigger supply — of idiots fool enough to buy our debt…

  12. wally commented on Sep 5

    “I don’t expect to hear such talk from anyone currently associated with the Fed, but its still refreshing to hear blunt honest talk occasionally . . .”

    Sad, isn’t it, when you openly say you do not expect basic honesty from your own government and nobody so much as raises an eyebrow. None of us expect it – rich, poor, Dems, Repubs… absolutely nobody in the US today thinks that a government-issue statement would be an honest statement.

  13. Paul Jones commented on Sep 5

    While the financial gimmicks haven’t helped, no one ever thought they themselves were, or could ever be, wealth generators. Their failure is only a failure to complete their primary mission: to delay or disguise permanent socio-economic change.

    No, these gimmicks only failed to preserve the illusion that the majority of people were still in the middle class.

    They failed to preserve the illusion that our technology was advancing *fast enough* to prevent Malthusian catastrophe.

    It hasn’t. We do not have the capacity to feed and supply 7 billion people. We tricked ourselves by saying that because we could do so “right now” that we could for long forestall disaster…

    It was only possible to think that by ignoring future consumption. Our social security / medicare / debt based economy was ALL ABOUT ignoring future obligation.

    Gee… said the neo-con supply-siders, THIS WILL ALL PAY FOR ITSELF!!!

    Even as a child I could see that was false. Now I and my children and my grandchildren will be paying for the “sins of the fathers”.

  14. Blackhalo commented on Sep 5

    “Paul Volcker was a hero of mine until he endorsed Barack Obama.”

    Something is broken and I do not think it is Volcker.

  15. Tom E. commented on Sep 6

    I was originally attracted to the Republican Party because they were the party of rational thought, the party of logic. Back in the late 1970’s the Democrats were the party of ill-logic. Union work rule restrictions that made no sense, crazy environmental laws (snail darter), harmful social policies (welfare as a way of life), high tax rates that took away all incentive and a defeatist national defense policy. It was a bubble in Democrat power that caused these excesses.

    Today the worm has turned. It is the Republicans who are in a power bubble. They are the ones who have become illogical and irrational. Other ill-logical by-products of this Republican power bubble include: the encouragement of illegal immigration. I have never heard as many illogical arguments on why our immigration laws should be broken and the selfish justifications for undermining the poorest citizens of our country. Another illogical argument is for unfettered free trade. With new technology, most jobs can now be outsourced: accounting, medical research, editing etc. How can workers compete if their cost of living is 5 times higher than someone in Asia? It is not that they are overpaid; it is that their basic living costs are way higher. Originally under Reagan free trade was promoted as a way to move Americans into higher skilled, higher paying jobs. At the time that made sense, but now these higher skilled jobs can be outsourced, driving down wages and opportunity. This does not make sense.

    There are many other areas were Republican policies have become ill-logical. I suspect most Republicans will not get it, as it is difficult to understand when you are inside the bubble. Power corrupts absolutely. Once again it is time for a change. Obama will become the new Reagan for the Democrats. Logic wins out in the end. Too bad parties cannot learn to moderate their actions. But, I guess it is human nature that leads to excess and bubbles and that cannot be changed.

  16. Richard commented on Sep 7

    Paul Volcker, the best decision Jimmy Carter ever made.

    Volcker helped kill off inflation, and 25 years later its back again. Thanks to Greenspan and Bernanke.

  17. Dave F commented on Sep 11

    Volcker is sincerely missed and I suspect any one with half a brain would put that man (and his policies) back in office.

    I do not support either party, nor can I, as our founding fathers once said

    “All the perplexities, confusion and distress in America arise not from defects in their Constitution or Confederation, nor from want of honor or virtue, so much as downright ignorance of the nature of coin, credit and circulation.”

  18. Joe Klein’s conscience commented on Sep 22

    CNBC Sucks:
    Do you really think McCain has a plan for the economy? He doesn’t and Volcker knows it. By the way, CNBC must be giddy with delight today. The unemployment rates jumpes almost a half of a percent and the market ends up 40? WTF?!?!?

  19. the “second” dc, it appears commented on Sep 29

    Unless he attacks Iran, this is Bush’s last middle finger to Americans.

    Like Henry Hill says in “Goodfellas”, if you get whacked, the chances are it is a member of your own crew that does it. Luca Brazzi (”Godfather”) could not have done a more effective hit on the Republican Party and the conservative movement than Bush has managed to accomplish.

  20. Gabe Markowitz- Actuary commented on Sep 30

    I think Greenspan has finally reached the senility we all knew was inevitable. I mean Da Nile ain’t just a river in Africa!

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