Former U.S. Federal Reserve Chairman Paul Volcker on the current financial crisis

Former U.S. Federal Reserve Chairman Paul Volcker speaks in New York about practices leading to the current financial market crisis, the role of the Federal Reserve in preventing and dealing with such crises and the need for changes in market regulation.
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Volcker_speech_408

Excerpt:

Former Federal Reserve Chairman Paul
Volcker
questioned the central bank’s decision to rescue Bear
Stearns Cos. with a $29 billion loan, saying it was at "the
very edge” of its legal authority.

"The Federal Reserve has judged it necessary to take
actions that extend to the very edge of its lawful and implied
powers, transcending in the process certain long-embedded
central banking principles and practices,” Volcker said in a
speech to the Economic Club of New York. 

Fed Chairman Ben S. Bernanke last month agreed to lend
against Bear Stearns securities, paving the way for JPMorgan
Chase & Co. to buy its Wall Street rival. Bernanke, who worked
with Treasury Secretary Henry Paulson to broker the bailout,
last week defended the move as necessary to prevent "severe”
damage to financial markets.      

Volcker, the Fed chairman from 1979 to 1987, had implicit
criticism for U.S. regulators and market participants who
allowed "excesses of subprime mortgages” to spread into “the
mother of all crises.” The Fed’s Bear Stearns loan was unusual,
he said.      

"What appears to be in substance a direct transfer of
mortgage and mortgage-backed securities of questionable pedigree
from an investment bank to the Federal Reserve seems to test the
time-honored central bank mantra in time of crisis: lend freely
at high rates against good collateral; test it to the point of
no return,” he said.    

      

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Sources:
Volcker Says Fed’s Bear Loan Stretches Legal Power
John Brinsley and Anthony Massucci   
Bloomberg, April 8 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=aPDZWKWhz21c

Volcker Video
http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vl8TvJRLodUg.asf

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What's been said:

Discussions found on the web:
  1. Steve Barry commented on Apr 8

    The true greatest central banker blames the Fed for allowing the excesses that caused the “mother of all crises.” Good enough for me. BTW if this is the mother of all crises, will it eclipse the Great Depression, as I have predicted?

  2. tom a taxpayer commented on Apr 8

    Volcker speaks truth to power! Go Paul!

    Saying the Fed was at “the very edge” of its legal authority. “transcending in the process certain long-embedded central banking principles and practices”, is sufficient cause for Congress and federal prosecutors to investigate the Fed for breaking the law, that is, criminal violations. Yes, it is that serious.

    Congress and federal prosecutors also need to investigate the Fed’s co-cospirator in the bailout, the Treasury Department. The bailout is is just the latest evidence of the Federal Reserve and the Treasury Department aiding and abetting Wall Street’s Ponzi scheme and investor fraud.

  3. Steve Barry commented on Apr 8

    Well said Tom…but I think Britney Spears will win a Nobel Prize before Congress prosecutes the Fed.

  4. Donny commented on Apr 8

    I wish I could hear the G.D. video, but because I have a Mac, NO DICE.

  5. Johnnyvee commented on Apr 8

    Volker made numerous insightful observations…the whole speech is worth listening to. He noted that it will take more than the fed to get us out of this mess and referenced Fannie and Freddie. I am still waiting for my 3% gov’t loan.

  6. David commented on Apr 8

    Interesting to read some of Volcker’s recent comments criticizing recent Fed actions. I’ll have to watch this clip.

    Did you see Volcker’s recent appearance on Charlie Rose last month?

    http://www.charlierose.com/guests/paul-volcker

    I have to admit, I didn’t hear much of what was said, as I spent the first 10 minutes of the interview Googling the cause of Charlie’s black eye (all of a sudden I’m a gossip whore).

  7. Lindsay commented on Apr 8

    Why isn’t the government offering all qualified buyers a limited time offer for a down payment on a home? It seems to me that getting those who are sitting out of the market back into the system using such an incentive is a better idea than a) allowing the courts to freeze interest rates, b) allowing homeowners with bad debt to walk away, c) allowing Wall Street unreasonable bailouts. Let’s stimulate demand and then worry about those who tightened the supply in the first place.

  8. The Mania commented on Apr 8

    Maybe it’s just where I’ve been clicking, but I find no shortage of analysis of why we are here, but very little on the way forward.

    Can anyone point me in the direction of the best thinking on how we work this problem?

    Or is the problem unworkable and I should just go get a tin cup and pencils…

  9. Steve Barry commented on Apr 8

    Lindsay,

    Look at this chart and realize nothing will work. the level this was allowed to hit is scandalous.

    History of Housing

  10. Marcus Aurelius commented on Apr 8

    Posted by: The Mania | Apr 8, 2008 11:39:29 PM

    _______

    I think we need to let it crash. It’s going down anyway – attempts to forestall the inevitable will only cost more and make matters worse. We can’t rebuild until we clear the wreckage.

  11. Hoppy commented on Apr 9

    Wow, the old bird still has it. Questions at the end were interesting – it says something when people as high as their stature were asking Vockler for his views on inflation/price stability. Sign of things to come?

  12. SPECTRE of Deflation commented on Apr 9

    Further down the rabbit hole we go. I wonder what Volker thinks regarding this assclown idea:

    Fed Wants to Issue its Own Debt for Credit Crunch

    Fed Weighs Its Options in Easing Crunch
    By GREG IP
    April 9, 2008

    WASHINGTON — The Federal Reserve is considering contingency plans for expanding its lending power in the event its recent steps to unfreeze credit markets fail.

    Among the options: Having the Treasury borrow more money than it needs to fund the government and leave the proceeds on deposit at the Fed, which would issue debt under its own name rather than the Treasury’s; and asking Congress for immediate authority for the Fed to pay interest on commercial-bank reserves instead of waiting until a previously enacted law permits it in 2011.

    • The Issue: The Fed has sold or committed a lot of its Treasury portfolio to support markets. Some worry it will soon run out of room to do more.
    • The News: The Fed is considering several contingency plans for getting more lending capacity so that won’t happen.
    • The Bottom Line: The Fed has lots of firepower left before it has to turn to these contingencies.No moves are imminent because the Fed has plenty of maneuvering room. The internal discussions are part of a continuing effort at the Fed, similar to what is under way at foreign central banks, to determine its options if the credit crunch becomes even more severe. Fed officials believe the plans largely eliminate the risk that the Fed will exhaust its stockpile of Treasury bonds and thus lose its ability to backstop the financial system, as some on Wall Street fear.

    British and Swiss central banks also are contemplating contingency plans. For now, the European Central Bank is reluctant to consider options that require substantial modifications of its standard tools.

    The Fed, like any central bank, could print unlimited amounts of money, but that would push short-term interest rates lower than it believes would be wise. The contingency planning seeks ways to relieve strains in credit markets and restore liquidity without pushing down rates.

    SNIP

  13. tom a taxpayer commented on Apr 9

    In regard to the Fed Wants to Issue its Own Debt for Credit Crunch, here’s what Sir Walter Scott has to say:
    “Oh what a tangled web we weave, When first we practice to deceive”

  14. kateNC commented on Apr 9

    For those of us with iMacs, could you also provide the link to the transcript since we can’t see the video unless we download Windows software?

    I found it but the server is busy.

    Thanks

  15. John commented on Apr 9

    I put the blame right at the top– with Bush and his AssClown group of economic advisors, which includes the PWG on Financial Markets.
    Someone posted here not long ago some White House Press releases– quotes from Bush himself — about making housing more affordable and setting a mandate to get more people into homes. Looks like just the reverse is going to happen by the time he leaves Office.
    The Executive Branch is responsible for enforcing the Laws governing Home Lending Practices, those that were already on the books (of which there are many) and those that have been revised over the years.. The Fed, OTS, SEC, FHA, OFHEO, Treasury etc. all dropped the ball. Coincidence?? When the Bush administration Cheerleaded nearly all of the (Highly Suspect) economic data that came out on the economy from 2005 to 2007?? I doubt it. I think both Federal and State regulators were pressured into turning a blind eye by the Bush Administration as these (Fee Generating) shoddy lending practices got underway.
    Notwithstanding this argument you dump the Federal Funds rate into the gutter, hold it there, encourage folks to consider taking out subprime mortgages (despite warnings from Gramlich and Susan Bies) with Federal and State Regulators looking the other way, what could one Reasonably Anticipate the outcome would be with the Banks trying to compete with one another??? Further, what could you Reasonably Anticipate other countries doing that have their currencies pegged to the U.S. dollar??? Ratcheting up their Money Supplies as well??? Mimicking some of the same lending practices as their U.S. counterparts????
    Calling all of this ‘Hindsight’ may have been an understandable argument had we not gone through past similar episodes with the Banks– and most recently some 20 years ago with Bush 41.
    We went into Iraq as a ‘Preemptive Measure’ for the sake of ‘National Security’.
    How about the Security of the entire Financial System of this Country (as it pertains to National Security matters???) The Bush administration took the accolades for a “Goldilocks” economy (as some of the CNBS’ers would have it) on much Highly Suspect economic data until it all nearly Blew Up last month– and Likely would have had the Federal Reserve not rushed in (on a Weekend) with some Historically Unprecedented Moves. And throughout most of 2007 the SubPrime Garbage, we were told, was “All Contained”.
    The U.S. is still the Big Dog on the Block when it comes to Global GDP– which means it bears a greater responsibility for leadership in establishing a sound Global Financial System.
    For someone who (supposedly) got himself an MBA from Harvard Dubya has proven himself to be a Low Watt Bulb and an Incompetent Boob. I nominate him for ASSCLOWN OF THE YEAR AWARD!!
    I truly think now that, looking back on it, Rolling Stone Magazine Hit the nail on the head with an Illustration of George W. Bush sitting on a stool wearing a DUNCE CAP.
    As the old cliche goes ‘A picture is worth a thousand words’…

  16. surfinsriguy commented on Apr 9

    There’s not much to look back upon historically for guidance going forward. Michael Jordan can’t step back onto an NBA floor and do what he did, neither can Nickalaus compete with Tiger, Montana with Brady, etc. Finance may not be an athletic endeavor, but it does take flexibility, ingenuity, discipline. Volcker had his day and it is gone, long gone. The best we have today are on the court playing their hearts out and that’s the best that can be done for now…

  17. Francois commented on Apr 9

    We can have all the smartest, brightest, energetic and charismatic people we wish at the top.

    But Volcker seems to have something very few people of those have: kahunas, integrity and a take no BS attitude.

  18. wunsacon commented on Apr 9

    >> Finance may not be an athletic endeavor, but it does take flexibility, ingenuity, discipline.

    Maybe it takes less flexibility/ingenuity and more discipline, especially if you don’t exercise lots of flexibility/ingenuity in the first place.

  19. wunsacon commented on Apr 9

    SPECTRE, my longs are mostly in the commodity complex, which will “benefit” nominally from rampant printing. But, even as I read your snippet regarding proposals that I’m supposedly anticipating with my long positions, I still have to say “wow, I can’t believe they’ll actually do that”.

  20. Douglas Watts commented on Apr 9

    Sports metaphors don’t work. In sports you aren’t rewarded for lying.

  21. hyde commented on Apr 9

    this makes me want to stand up and cheer. Paul Volcker is a giant compared to the midgets who are Greenspan and Bernanke.

  22. SPECTRE of Deflation commented on Apr 9

    We can have all the smartest, brightest, energetic and charismatic people we wish at the top.

    But Volcker seems to have something very few people of those have: kahunas, integrity and a take no BS attitude.

    Posted by: Francois | Apr 9, 2008 2:32:49 AM

    For the simple minded it’s easier to blame Bush, but you are correct. For those that understand fractional reserve banking and fiat money, this has been coming since 1913.

  23. grumpyoldvet commented on Apr 9

    Ya know Surfrisinguy Best and the Brightest reminds me of JFKs cabinet and advisors…tho they knew better they still blundered into the Vietnam quagmire….the current group may be bright but they are afterall responding mre to politics than they are to good sound finance….they are merely putting a compress on a bad chest wound…..most of the time that does not work out too well, especially when it’s all they do

  24. SPECTRE of Deflation commented on Apr 9

    Wunsacon, I’m also right there with you as a hedge just in case they do the unthinkable, but I have to pinch myself to make sure I’m not having a nightmare. At the rate we are going, being long anything may not matter. Scary stuff for sure.

  25. John Thompson commented on Apr 9

    Let’s just get the ECB, JCB and the Fed to hit the reset button.

    We’ll start everyone out with their portion of the amount we are in debt in the world. Revalue accordingly. This would do nicely to get
    the new technologies off the ground.

    In other words, there will be no crisis.

  26. me commented on Apr 9

    Hindsight sure is great isn’t it? I don’t remember old Paul singing his song in the 90s did I? I don’t remember any split votes on the Fed or did Greenspan have all the votes?

    Wall Street avarice and lack of Bush oversight has caused this. You have to be stupid to think that 7-11 clerks can buy $800,000 building in Miami and there not be issues.

    I have said it many times here but 2 1/2 times income for housing and that’s it. Any deviation from that and these problems did not need the brilliant hindsight of today to predict the result.

  27. The Spoiler commented on Apr 9

    The Fed couldn’t let BS go bankrupt. That would have meant establishing a true valuation for all those mortgage backed securities in their portfolio. That would have benchmarked all of those securities and brought down the values of the rest of the investment houses who have exposure (ie. all of them). Can’t allow those clowns to actually suffer the downside risk of their “market innovations”…that is what taxpayers are for!

  28. Dane Wayne commented on Apr 9

    You said it Spoiler.

    Socialism for the rich and Capitalism for the rest of us.

  29. DonKei commented on Apr 9

    Paul Volker, Meredith Whitney, Barry Ritholtz, Warren Buffet, Michael Panzner (Financial Armeggedon), Spectre of Deflation, Ross, Wunascon, et al.–at least there are a few that are willing to point out that the Masters of the Universe aren’t and never were.

    It will all fall on the dollar’s weak shoulders. Get out of it while you can.

  30. DonKei commented on Apr 9

    And I left off MA and MS.

  31. me commented on Apr 9

    And then again maybe DonKei should read Martin Wolf today in the FT.

    US monetary policy cannot be responsible for all these bubbles. This might not be the case if these other countries had followed US policy slavishly. But they did not (see chart). The Bank of England, for example, followed what seems to be a consistently tighter monetary policy than the Fed. Yet house prices in the UK may be even more overvalued.

    So what might explain these bubbles? I would point to four causes: very low long-term real interest rates, because of the global savings glut; low nominal interest rates, because of both low real rates and the benign inflationary environment; the lengthy experience of economic stability; and, above all, the liberalisation of mortgage finance in many countries. The greater the availability of finance, the easier it was for purchasers to pay higher house prices and the higher those prices, the more willing were people to purchase, in the expectation of still higher prices. The WEO makes clear that house prices tended to rise fastest where finance was most easily available, as one might expect.

    http://www.ft.com/cms/s/0/6c50fef0-056a-11dd-a9e0-0000779fd2ac.html

  32. flow5 commented on Apr 9

    Paul Volcker should have been sent to prison. He didn’t know the difference between non-borrowed reserves(the FOMC’s target) and borrowed reserves (which the FED ignored). Well contrast that today when Bernanke is operating exclusively using borrowed reserves.

    That is, ONE DOLLAR OF BORROWED-RESERVES HAS THE SAME LEGAL-ECONOMIC IMPACT AS ONE DOLLAR OF NON-BORROWED-RESERVES.

    Because of a 22.4% FFR in the 1st qtr of 1981, Congress was pressured to repeal usury rates. Now we have exhorbitant, predatory, & merciless payday loan rates, confined almost exclusively to the citizens at the poverty level, in 48 states.

  33. pft commented on Apr 9

    Volcker. Lets see, wasn’t he the guy who gave us the S&L crisis, monetized foreign debt to bail out banks who loaned large sums to 3rd world countries, and destroyed the physical economy with double digit interest rates to fight inflation that was caused entirely from oil price increases, for which interest rates did nothing but cause a great deal of harm to manufacturing and stopped investments in energy and infrastructure projects, and supported Reagans voodo economics that caused our debt to skyrocket. Yet is being spun as some kind of a hero who can provide insight into what should be done in this crisis?.

    Folks, I worry. Maybe something they are putting in the water. Something.

  34. kennycan commented on Apr 10

    Sports metaphors don’t work. In sports you aren’t rewarded for lying.

    Sure you are –

    The head fake in basketball.
    The trick play in football.
    Star player injured who then steps out on the court in the third quarter.
    The curve ball.
    The knuckle ball.
    Squaring to bunt, then swinging away.

    All designed to get your opponent to think you are doing one thing, commit to a defense and then you do another.

    In other words, lying.

    You can’t cheat an honest man. Unless you’re the government and do it at gunpoint.

    Government always cheats you and never protects you. Calls more more regulation or “proper enforcement” of exisitng regulations are not going to help. WHy are we surprised when government and those who can influence it end up the winners while we end up losers?

    TAKE POWER AWAY FROM THE FEDERAL GOVERNMENT.

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