Volcker: “Bernanke a One Termer”

The following information comes from a well-placed sourced, whose partner was present at the event — but since its 2nd or 3rd hand to me, consider it a rumor until proven otherwise.

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Over the prior weekend of April 6, former Fed Chair Paul Volcker was present at a small gathering. Several luminaries from the worlds of finance, economics and trading were in also attendance.

The conversation turned to the present Federal Reserve. The blunt, straight talking Volcker stated that Ben Bernanke is not likely to serve more than one term as FOMC chief. Quote: "He’s a one-termer."

Why?

For reasons both political and economic.

The economic reasons are the weaker of the two issues. Most of the forces leading to the current situation were in effect long before Bernanke became Fed chief. But if the current crisis gets worse — a possibility only a few economists and analysts see as likely — heads will have to roll. While the current administration does not believe in falling on your own sword in the event of failure, it has been considered honorable amongst other, less disingenuous administrations.

Regardless of who wins the White House in November, there is a strong impetus for change across the board. Bernanke was George W. Bush’ Council of Economic Advisers Chairman. If a Democrat wins, the political pressure for change will be even greater.

It is only fair to point out that Ben Bernanke essentially inherited the current crisis. As far as assessing where the blame goes, between him and Greenspan, I find its 85/15 in favor of Greenspan.

Why only 15% responsibility? As we have long lamented, the policies that led directly to the current crisis trace directly back to Greenspan. His malfeasance in refusing to allow the Fed to perform its duties as regulator of banks — despite Ed Gramlich’s warning about predatory lending — is the enabling governmental act for the reckless and irresponsible lending frenzy. Easy Al then compounded the problem by dropping rates to generational lows at 1%, and then keeping them at 1% for an unprecedented length of time. His actions are what is primarily at fault here.

Bernanke only gets 15% for his prior words, not actions. 5% responsibility as CEA chair — but he was so late in this admin that most of the economically problematic policies were already well in effect. He gets another 5% for his now infamous deflation speech. That rationalized Greenspan’s ultra-low rates, and deflected criticism. Lastly, the "Savings Glut" meme he help to propagate is also worth 5%. Each of these two speeches were influential, and raised Benrnake’s profile. They also served to provide intellectual cover for the now discredited and otherwise indefensible policies of Alan Greenspan. Hence, but 15% is Bernanke’s fault.

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The bottom line remains this is an ongoing issue, one that is likely to be increasingly costly for US taxpayers, and damaging to the global economy.

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Previously:

Must See TV: Volcker’s Speech on Financial Crises   http://bigpicture.typepad.com/comments/2008/04/paul-volckers-s.html 

Sources:
Deflation: Making Sure "It" Doesn’t Happen Here
Governor Ben S. Bernanke
November 21, 2002
http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm

The Global Saving Glut and the U.S. Current Account Deficit 
Governor Ben S. Bernanke 
Federal Reserve, April 14, 2005.  http://www.federalreserve.gov/boarddocs/speeches/2005/200503102/default.htm

Ex-Fed Chairman Chides Current One
MICHAEL M. GRYNBAUM
NYT, April 9, 2008
http://www.nytimes.com/2008/04/09/business/09fomc.html

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’s Demarche
WSJ, April 9, 2008; Page A14
http://online.wsj.com/article/SB120769723589099695.html

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What's been said:

Discussions found on the web:
  1. Scot Frew commented on Apr 14

    So here’s my first, fanciful thought. We had the fairly direct assault on BB from PV—the borderline illegal Fed action in the Bear takeover interview.

    Recall that Volcker’s an economic advisor to Obama. It’s spread by PV himself, as the start of a viral movement to undermine BB. Obama’s elected? As one of his first moves, he announces the appointment of a new head of the Federal Reserve, former chairman Paul Adolph Volcker.

  2. VennData commented on Apr 14

    One termer nominee(s): Anyone who used the term “contained” in 2007.

    What happened to the impeachment push? Was it contained too?

  3. Ross commented on Apr 14

    A new broom sweeps clean.

  4. BG commented on Apr 14

    PV would get my vote. He would be a very good first step in turning this thing around.

    The Fed has gotten too cozy/politically-connected with Wall Street.

    My only fear in replacing BB is that we could end up with someone who is even worse! It’s kind of like averaging down on a stock. You had better know what the hell you are doing or you could wind up in worse shape than if you had done nothing at all.

  5. Sue commented on Apr 14

    The same will be true of the next president. A one termer, who will be hamstrung by the fact the current administration has stripped clean any resources or reserves a president might formerly have counted on.

  6. Philippe commented on Apr 14

    « Selon que vous serez puissant ou misérable,
    Les jugements de cour vous rendront blanc ou noir »

    to be read

    “Crownies judgements will make you guilty or innocent in accordance with your power”

    Les annimaux malades de la Peste
    J de Lafontaine

  7. weinerdog43 commented on Apr 14

    You may not like Obama, but consider that Clinton thinks Greenspan should be a go to advisor in her administration, and that McCain has Phil Gramm running his team. I’ll go w/Volcker every time thank you very much.

  8. Brian commented on Apr 14

    I imagine there will be a retail sales post at some point, but look past the headline and look at the data. Sales up $586 mil. Gas station sales were up $439 mil, and non-store retailers were up $537mil. Gas and home heating oil inflation represented the bulk of the retail sales gain.

  9. Marcus commented on Apr 14

    Recall that Volcker’s an economic advisor to Obama. It’s spread by PV himself, as the start of a viral movement to undermine BB. Obama’s elected? As one of his first moves, he announces the appointment of a new head of the Federal Reserve, former chairman Paul Adolph Volcker.

    Posted by: Scot Frew | Apr 14, 2008 7:13:28 AM

    ___________

    God help you if you have a historically unfortunate name and a wignut gets ahold of it.

  10. Marcus Aurelius commented on Apr 14

    My full name didn’t go through:

    Marcus “Ghengis Khan” Aurelius

  11. Marcus Aurelius commented on Apr 14

    My full name didn’t go through:

    Marcus “Ghengis Khan” Aurelius

  12. Marcus Aurelius commented on Apr 14

    My full name didn’t go through:

    Marcus “Ghengis Khan” Aurelius

  13. Marcus Aurelius commented on Apr 14

    My full name didn’t go through:

    Marcus “Ghengis Khan” Aurelius

  14. Wayne Mulligan commented on Apr 14

    @Sue – Great call! I wouldn’t want either job at the moment.

  15. Andrew commented on Apr 14

    But for that Bernanke’s term doesn’t end until 2010. So whoever wins is stuck with him for at least two years.

  16. larster commented on Apr 14

    I think that the prsent Congress is a good model for what will happen to the next administration. The Bush administration has literally screwed up every cabinet department by placing ideological hacks into them and allowing no development of public policy by the departments. So think of the next president as a lot like Waxman. Where does he or she start to look and by the time they look at one problem several others flare up. Competence will not matter as you will be constantly behind the curve. The publics short term memory will play into this and create more difficulties. More interesting times ahead.

  17. Thomas Jefferson commented on Apr 14

    Clean house? The two party system is a monopoly on power that feeds off of each other. They both benefit from this ‘arrangement’ that I opposed from the start of this great experiment. There is literally no difference. The fact that these clowns have everyone bickering amongst ourselves as to whether a D or R should win puts us exactly where elitists want us. That is, the eye is off the problem and attention is diverted away from their cronyism and a busted political process that benefits those in power.

    I’m going to say something that no one on here will agree with because nearly everyone believes the pablum the media feeds them. And, everyone believes these problems were created by low interest rates in 2001. Both completely erroneous.

    Greenspan was the lackey that was used to take the hit for the mess WALL STREET made. He was thrown under the bus to divert attention. The Fed simply follows the markets. They can’t save or fix any economy. That is completely ridiculous. They don’t impact economic policy except through any regulatory enforcement powers given to them by Congress. Congress that resides in the belly of the Wall Street beast. Financial clowns created this mess. Clowns who repeatedly make these messes and ALWAYS blame someone else.

    Greenspan diverts attention from what is needed to fix this problem. Regulate Wall Street’s monopoly, bust up the big financial firms and return transparency to the markets that the crooks have paid off politicians to achieve.

  18. Joe Klein’s conscience commented on Apr 14

    Andrew:
    What would stop Obama from telling “B-B52” Ben to resign? Or firing him? I hope you aren’t telling me that Ben can’t be fired.

  19. Contrarian commented on Apr 14

    Speaking of ongoing issues, here’s that word, “surprise,” again.

    “Wachovia Corp. will slash its dividend and raise $7 billion in a share sale after reporting a ****surprising**** first-quarter loss on Monday of $393 million.”

    Adrenaline junkies need to start forecasting earnings. The “surprises” will really jumpstart their days.

  20. Loren Steffy commented on Apr 14

    BizLinks | 4.14.08

    Delta, Northwest close to making world’s biggest airline 35 Firms OK’d to Bid on Iraq Oil Deals Even Credit Card Offers Are Ebbing — one benefit to the credit crunch. Blockbuster bids for Circuit City Volcker: Bernanke a One…

  21. Ross commented on Apr 14

    TJ,
    We all thought you was dead!

    Couldn’t agree with you more. So, how soon til we get Andy Jackson?

  22. Ronald Reagan commented on Apr 14

    Without Paul Volker in 1982, we’d never have had “Morning in America” in 1984. When money is the problem, it matters who runs the fed.

  23. Murray Trillionaire commented on Apr 14

    I think the problem is that this post tends to always be given to an economist. And economists don’t know anything about the economy until it after it happens. If we were to make the next head of the Fed some big psychic like Miss Cleo, we would not only know about a recession months in advance but also be told if our spouses are cheating on us.

    [EDITOR: see link below]

    http://blog.murraytrillionaire.com

  24. Thomas Jefferson commented on Apr 14

    Ahh, I love Paul Volcker as much as anyone but there is substantial evidence that inflation had broken and that the Fed and Volcker had nothing to do with it. That all they did is cause the worse recession in ages. That the markets had taken care of the inflation genie. But, those steeped in nonsense that is taught in economics courses believe whatever they are told. And, correlation equals causation in that camp. It matters not who runs the Fed. It matters most that the underlying economy is structural sound. Something Fed policy has zero control over. Old beliefs die hard Mr. Reagan.

  25. Sue commented on Apr 14

    Brian, and if you “ex-out” food as well as energy, the way it’s done for inflation calculations, retail sales fell rather than rose in March.

  26. Toast commented on Apr 14

    The problems with China’s economy are such that being out of emerging stock markets is a very good idea. China’s leaders have fooled the world’s population into thinking they have a huge amount of dollars at their disposal, which is untrue. The trade surplus is being used to a) line the leaders’ pockets; b) feed the trillion peasants who earn around $5 per day; c) build the thousands of buildings to house and work the population; d) build a world-leading defence for the upcoming commodities war e) build a space ship to flee to Mars once global warming gets going f) buy all the abortionable records their pop stars release g) invest in lead h) you’re still reading this? You are a div.

    Toastmeister

  27. JRip commented on Apr 14

    Who is running (leading) the Federal Government response and the Federal Reserve response right now?

    The hard-charging Paulson or the quiet academic Bernanke?

  28. me commented on Apr 14

    PV may or may NOT deserve all these accolades but when he was in the FED ruled the world. Now, a debtor nation with a declining standard of living, the FED doesn’t have the sway it did. The Euro raising rates, capital flight from the US, rising commodities. PV talks a big game when there is nothing on the line for him.

    As I recall, thanks to PV Carter was a one termer too, and Cater had way better economic performance than Bush.

    Count me out for going back to PV and his draconian BS.

  29. MitchN commented on Apr 14

    Tom Jefferson wrote:

    Ahh, I love Paul Volcker as much as anyone but there is substantial evidence that inflation had broken and that the Fed and Volcker had nothing to do with it.

    I’d love to see that evidence, Tom.

  30. Ben Bernanke commented on Apr 14

    Paul Volcker is an enemy of the US economy
    By Ben Bernanke

    First, Greenspan criticizes my efforts to clean up the subprime mess of an economy he left me, and now former Fed Chair Paul Volcker has accused me of operating at “the very edge” of my legal authority. If rescuing Bear Stearns (and therefore the economy in general) is pushing my authority, then I don’t want to be an authority-following quasi-governmental non-elected executive officer.

    Paul’s very bitter because the president who appointed him (Jimmy Carter) couldn’t farm his own peanut, much less expand his legal authority. If there’s one thing President Bush taught me (and there is only one thing he taught me), it’s that a federal executive has the authority to expand his own authority. My charter was clearly to save the economy through any means necessary.

    I hereby declare Paul Volcker an enemy combatant to the economy of the United States of America and issue a warrant for his arrest. We’re in the process of building our first Federal Reserve Prison. He will be tried, and if necessary executed, in private so as not to cause any disruptions to the markets.

  31. Andrew commented on Apr 14

    I am 99% certain that Bernanke cannot be fired. The whole idea is to have an independent fed, thus the staggered terms and what not.

  32. michael schumacher commented on Apr 14

    And once in office what did Bernancke continue??

    The same failed policy of inflate at any cost. No sympathy for him as he was presented as his own man but what we have now is just an extension of greenspan’s failure.

    He could have raised rates when they clearly called for it (inflation anyone??) instead of opening up the printing presses in an attempt to save a sector that is not worth saving in it’s current form. Oh year he’s also doing the flag waving patriotic bullshit greenspan was famous for.

    The problem is who do we get in his place??? and will it really matter at that point?..damage has been done at a record pace….

    Ciao
    MS

  33. stormrunner commented on Apr 14

    The banking lobby spent millions starting under Bush 1 to create a circle jerk of conflicts of interest regarding Banking, Investment, Insurance and Ratings agencies. A script for disaster easily foreseen and in fact outlawed after the first “Great Depression”. Why is no one making the case for this public, i.e. regarding the fact that Hillary directly and McCain covertly had great degrees of participation in this unfolding debaucle, there is no justification to alow any of these players to avoid responsability regarding our current economic crisis.

    On November 12, 1999, President Bill Clinton signed into law the Gramm-Leach-Bliley Act, which repealed the Glass-Steagall Act of 1933.

    History of the engineering steps

    http://www.pbs.org/wgbh/pages/frontline/shows/wallstreet/weill/demise.html

    Just days after the administration (including the Treasury Department) agrees to support the repeal, Treasury Secretary Robert Rubin, the former co-chairman of a major Wall Street investment bank, Goldman Sachs, raises eyebrows by accepting a top job at Citigroup as Weill’s chief lieutenant. The previous year, Weill had called Secretary Rubin to give him advance notice of the upcoming merger announcement. When Weill told Rubin he had some important news, the secretary reportedly quipped, “You’re buying the government?”

    The FED is just atool of the banking industry not the people and now a power grab by same is in play, ridiculous.

  34. bsneath commented on Apr 14

    I agree completely that Greenspan’s failure to adequately regulate the housing finance markets was a great blunder.

    I suggest though that his actions to lower interest rates were the proper call. CR today has posted an excellent chart on retail sales adjusted for inflation. Sales were falling YOY in 02 & 03. The economy WAS at risk of falling into a deflationary cycle.

    If we could rewrite history and have had lower interest rates, without the housing finance insanity, our economy would have begun the transition from consumption to investment much sooner. Rather than absurd levels of home equity withdrawl, toxic mortgage debt and the upcoming bad commercial debt that followed new housing, we likely would have seen much lower levels of consumption and energy demand, the dollar adjust downward a bit sooner and export industries accelerating earlier.

    The absurdity of the last 5 years was that regulators took a blind eye towards teaser rate, interest only, 100% financing, no documentation, poor credit quality home finance schemes.

    Greed is a universal human trait and one that is impossible to self-regulate, be it the investment banker who stands to earn a 7 figure bonus at the end of the year or the potential homeowner who is told that he/she can live in the McMansion of their dreams even though they did not earn enough to make the monthly payments and had not saved enough to qualify under normal times for homeownership of any kind. Not to mention the fraudsters who had open season on working the system to pull out cash with no intent of making even the first mortgage payment.

    In my neighborhood, houses were being constructed and sold at a rate that should have taken about 5 years to build out. Suddenly in the summer of 2006, every vacant lot had a house under construction and every house was under contract. Within 6 months the “zillow” value of my house shot up 20%.

    The financial experts in the mortgage field must have known at that time that they were dealing with a time bomb and a lit fuse, but the short term profits (greed) were too compelling.

    I do accept Greenspan’s philosophy in general that too much regulation will result in slower economic growth in the long run. I do not accept his libertarian viewpoint that there should only be self-regulation. This in my opinion will be recorded in the history books as the great failing of the Greenspan era.

    Greenspan’s decisions to lower interest rates were valid, necessary and would have greatly benefited the economy had the housing finance fiasco been held in check through reasonable regulatory actions.

  35. DL commented on Apr 14

    Bernanke is just doing what Bush and (treasury secretary) Paulson are telling him to do …. mitigate the economic downturn no matter what the cost.

    My guess is that Bush is particularly motivated to help McCain because McCain will keep the war going, whereas Obama will try to pull out as soon as possible.

  36. Alfred commented on Apr 14

    As much as I admire BR’s continued criticism of the former Fed chairman and his successor, I think his criticism misses the point.

    I guess everybody can agree that independence is the corner stone for good and effective central bank policy. As Volcker pointed out in his recent speech the Fed is granted a “high degree of independence” in pursuing its responsibility. The Federal Reserve with its dual mandate compromises this independence.

    A central bank, as the custodian of the countries currency, can open and close the valves of money supply. It can not stimulate growth. Accommodating money supply does not necessarily lead to a stronger economy. Only government with fiscal policy and legislative actions can stimulate the economy.

    The Fed’s growth mandate is a bogus mandate. It serves as an excuse to lower interest rates on a hunch ( Geenspan’s deflation scare in 2001) that the business cycle might be turning. It is all but logical to assume that politicians in Washington assert influence over the Fed via the growth mandate in favor of their agenda. To point towards low interest rates and lack of responsible oversight is dangerous because it conceals the real reason for all the problems we are having.

  37. Tom B commented on Apr 14

    “While the current administration does not believe in falling on your own sword in the event of failure,”

    If W believed in that kind of accountability, he would look like a porcupine.

    In my view, the best “quick fix” for the economy is to leave Iraq. As Robert Reich put it recently, building bridges in Baghdad provides little stimulus to the US economy and increases the deficit.

  38. Greg0658 commented on Apr 14

    Volcker on Charlie Rose concerning the 1st window opening

    “…..the Federal Reserve, first began lending to them, through a bank, is kind of unprecidented……”

    anyone:
    was that a single bank back in August? the name of it?

  39. Bob Brandt commented on Apr 14

    Ben – B has a beard that is growing whiter by the day. He may not survive in any case and his beard is telling the story of his stress…a man ill-suited for the job.

    But then who in Bush’s array is ready….Gonzalez can’t even find another job after AG of the USA.

    No comment needed.

  40. Rock commented on Apr 14

    In times of war, select a warrior to lead, in times of peace, select a diplomat. They rarely are the same person.

    Mr. Bernanke is known to have a good understanding of the Great Depression. I would not be surprised to learn that the FED knew which way the wind was blowing and knew they were headed for an economic contraction perhaps of historic proportions. Which is why they choose Mr. Bernanke (rightly or wrongly).

  41. ro commented on Apr 15

    I like and respect Paul Volcker, but if the UN had not supported Saddam Hussein we might never ended up in the Iraq war. PV never really came clean about that subject when he was hired to investigate. In the end he protected the institution.

    Pet. Peterson used PV to make the speech into a political push for BO. It was a wonderful speech which I fully agreed with 110%, but then to let Peterson use it for his own political will caused me to have a sleepless night. It signaled that there is really no one to vote for in this presidential election. It certainly is not correct the way Hillary has been treated. It is all so un-intellectual. Peterson and his so called agenda they are looking to gain control of OB which should be easy due to his inexperience and hunger for power. Peterson is a rich powerful billionaire and you could see his ego control in the room when the questioning began. He is a know it all. That too is dangerous because he doesn’t really understand nor have the ethics. Although he thinks he does. Please Paul Volcker you don’t need these people. Do it yourself. I trust in you but at times the people around you are somewhat questionable. I am sure it is of no fault of your own but the reality of power.

    Well if Volcker and Peterson think that it is the poor elderly social sec and Medicare that are ruining the country they are both dead wrong. Peterson should use his billions which he took from the American pension plans by selling his so called private equity firm on to the New York Stock Exchange. When it suited him he actually loved the public market, capital, and savings and his access to public money through our pension plans and mutual funds.
    We should mark every dollar he has and see who the previous owner was.

    Dear Mr. Volcker make the lawyers and insurance companies stop charging the health care system so the cost could come down. Let the hospitals and doctors become more efficient with their use of technology.

    If Hillary did not have her husband Bill as big baggage she could be a lot lighter. She is very bright. Bill was responsible for not using his veto when they got rid of the Glass Seagall Act., which permitted the banks to speculate with the American savings. I do not know the background to that NON-VETO. Please ask her to explain her feeling and understanding about it. Certainly Greenspan was a disaster in hundreds of ways. Why would she want him to help with economic problems- it creates a question mark on her understanding of economics and maybe she did not say that. Perhaps it was the media.

    Where do we all go from here- Mr. Volcker could help if he too gets rid of some bad baggage?

  42. Greg0658 commented on Apr 15

    ro:
    “but if the UN had not supported Saddam Hussein we might never ended up in the Iraq war” | me: defy America and support Russia?

    ro on election:
    “they are looking to gain control of OB which should be easy due to his inexperience and hunger for power

    Certainly Greenspan was a disaster in hundreds of ways. Why would she want him to help with economic problems

    I am sure it is of no fault of your own but the reality of power”

    me: ro you are a thinking

    like the thread “Big 5 Books of all time”
    billions of ideas and solutions

    Americas big stick is to big … imo

  43. ro commented on Apr 15

    Thanks Greg for your comment.

    I would vote for:

    These four together for joint President. Surely they would not damage the American dream.

    Mr. George Soros
    Mr. Paul Volcker
    Mr. Warren Buffet
    Mrs. Clinton ex Bill!

  44. Noah commented on Apr 15

    If the Fed slice of the blame pie was a 130/30 fund, it would be:

    Greenspan – 130% long (the blame)
    Bernanke – 30% short (the gratitude)

Read this next.

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