Volcker versus Vickers, Round One

Paul Volcker’s in town and he’s been everywhere!

He popped up on Bloomberg, and “said the pace of financial-regulatory reform has slowed ‘to the point of ineffectiveness’ because of the complex work needed and resistance of lobby groups.”

He made a few comments on Reuters, and said “there are limits as to how much more (the Federal Reserve) can do within things that are feasible for a central bank” with regards to the debt crisis in the USA.

And he delivered the prestigious Mais Lecture at Cass Business School last night.

I was invited to one of the events he attended at the Official Monetary and Financial Institutions Forum (OMFIF), and it’s ten years since I last bumped into Paul Volcker.

Back in 2000, he joined me on a panel at BAI Retail Delivery.

Back then, he was a highly respected, former Chairman of the Federal Reserve.

Today, he is a highly respected, former Chairman of the Federal Reserve, who has a rule.

The Volcker Rule.

The Volcker Rule is the modern version of Glass-Steagall, and says that banks cannot deal off their own book of business in the investment markets.

In other words, he’s effectively ended the US investment banking operation forever.

It’s been watered down a bit since, but Volcker is adamant that banks gambling in the world’s markets are not good for business.

He’s adamant about a lot of other things too, and here are a few highlights from the session I attended.

Paul began with a comment around China’s $3 trillion of reserves, and the imbalances this creates.  When China has enough dollar reserves to buy a quarter of America’s annual GDP, and America is at the tipping point of a debt crisis, something has gone a bit skewwhiff.

He’s also no fan of derivatives, and said that he has a standard offer to every freshly minted PHD student to prove whether any financial engineering instruments have delivered real improvements in the productivity and efficiency of the economy.

He has yet to receive a submission.

In fact, the instruments have purely lined the pockets of Wall Street as the wealth and income of the typical American family has not improved over the last twenty years.

Meanwhile there was an amazing increase in the concentration of wealth in the top 0.5% of the population.

That’s wrong and creates a world less about the haves and have nots, and more about the have nots and have yachts.

After around 35 minutes, I managed to get my question in about what he thought about Sir John Vickers’ Independent Banking Commission (ICB).

The ICB’s interim report recommends that banks are ring fenced so that, if there is another crisis and the investment bank fails, it can just be closed down.

Volcker would instead have the ruling that the investment bank that trades speculatively just should not exist within the bank.

He said that he “completely doesn’t understand the British approach, where they can leave all these questions unanswered.  They said they wanted a retail bank in the same holding company as everything else. I don’t know what ‘everything else’ means.  Is that not a bank too?  It’s just a wholesale bank.  Who makes the payment system work – the retail bank or the wholesale bank?

“… the philosophy is you are a group of banks that serve the consumers, the retail customer, and that hold their deposits with the central bank and so forth, does not solve the problem with all the other parts of the financial system.  I also don’t believe in a firewall or Chinese wall between them, as you need a very high ring fence to stop the deer jumping over.”

This view was expanded upon in the Cass lecture: “The question will inevitably arise as to the financial and regulatory logic of maintaining a ‘retail bank’ as part of what in most cases would appear a much larger, highly diversified and ‘systemically significant’ organisation … in any event, the nagging overriding question will still arise: how to deal with the imminent or actual failure of such a large, systemically significant, financial institution whether or not it is a ‘bank’.”

Back to the lunchtime meeting, he was asked his views on the European Central Bank (45 minutes), and was just as damning about them too: “It’s odd to have a very strong and very independent central bank without a government.”

On the euro, Paul hopes the euro will survive but the current crisis is “obviously The Test, and it’s a very big test.  Nevertheless, I wonder what would have happened today if you had not had the euro.”  Either way, “Europe will need bold and confident leadership to get through this.”

In terms of this crisis and how fast it will conclude, he said that “we’ve been going through a crisis of excessive debt creation around the world, and that deleveraging will take time … when you have a business crisis coupled with a financial crisis, it always take a long time to recover.  Just look at Japan.”

He said a lot more of course, and you can listen to the whole one hour discussion if you want, although the sound quality is poor …

Paul Volcker from Chris Skinner on Vimeo.

… the discussion opens with a few words from George Milling-Stanley (left), Managing Director of Government Affairs at the World Gold Council and Professor Lord Meghnad Desai (right), Chairman of the OMFIF Advisory Board, and is chaired by David Marsh (second from right), co-Chairman of OMFIF.

It began with nostalgia about the Mexican Financial Crisis, Helmut Schmidt, Walter Wriston and other stuff from the 1970s and 1980s.  Start listening at around 32 minutes if you want to miss the nostalgia.