Paul Volcker on FinReg, Subprime & Deregulation

“There is a certain circularity in all this business. You have a crisis, followed by some kind of reform, for better or worse, and things go well for a while, and then you have another crisis . . . People are nervous about the long-term outlook, and they should be.”

-Paul A. Volcker, senior White House adviser and former chairman of the Federal Reserve


This morning’s must read article is a long discussion about/interview with Paul Volcker in the Sunday NYT: Volcker Pushes for Reform, Regretting Past Silence. It is filled with fascinating insights and asides.

Some of Volcker’s observations and comments:

-Reform legislation doesn’t go far enough in curbing potentially problematic bank activities; it still gives banks “too much wiggle room” to repeat their reckless behaviors

-He would have ban FDIC commercial banks from proprietary trading; Quote: “I did not realize that the speculative trading by commercial banks had gotten as far out of hand as it had.”

-Reagan replaced Volcker in large part due to his “reluctance to deregulate;” most deregulation came after he left the Fed.

-Alan Greenspan, openly campaigned to repeal Glass-Steagall; Volcker opposed the repeal, but he didn’t go public with his concerns.

-He regrets “failing to speak out more forcefully about the dangers” of financial deregulation;

Perhaps the most interesting aside from Tall Paul — certainly, the least known or understood aspect of the crisis — was his blame of the too rapid deregulation of rate ceilings for the creation of Subprime loans:

“In the wake of those changes, banks were suddenly free to charge more for risky loans, and that encouraged risky lending. The subprime mortgage market grew out of this dynamic, as did the panoply of complex, mortgage-backed securities, credit-default swaps and heart-stopping leverage that finally produced the 2008 crisis.” (emphasis added)

Fascinating stuff, well worth your time this Sunday morning . . .


Volcker Pushes for Reform, Regretting Past Silence
NYT, July 9, 2010

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