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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.

 

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  • You cite Paul Volcker’s references to the growing income disparities within the USA’s working population – re financial engineeering instruments and how the wealth and income of the typical American family has not improved over the last twenty years. There is also the wider, and long-term, ‘decoupling’ of the share of national income or wealth that USA labour can secure through appropriately remunerated work.
    Similar observations can increasingly be made of the UK. A particular aspect that policy makers have become more aware of has less to do with the familiar poverty that blights the lives of many of the poorest people in UK society.
    The new concern is about the deterioration in the living standards and financial health of low-to-middle-income households over several decades – accompanied by a growing concentration of income and wealth among those who are already the very best-off in UK society.
    The recent, authoritative and evidence-based, ’Growth without Gain’ research paper from the Resolution Foundation in the UK, provides substantial verification of the lack of improvement over many decades of the middle income groups in the UK.
    One troubling finding was that the relative deterioration in the income and wealth status of low-to-middle income households in the UK actually pre-dated the credit crunch and what followed. For example, the authors report that:
    “In absolute terms, UK earnings growth was strong from 1977 to 2003 but from 2003-08 – before the 2008-09 recession, and despite GDP growth of 11 percent in the period – wages in the bottom half flat-lined.. Based on current government forecasts, we expect that average wages will be no higher in 2015 than they were in 2001.12 In relative terms too, the position of the UK’s 11 million people living on low-to-middle incomes has deteriorated…”
    Another troubling finding was that low-to-middle income households in particular, found themselves pushed more and more into part-dependency on state benefits – a consequence of the taxation and wages systems in the UK, rather than due to any fecklessness or irresponsibility on the part of these households.
    But perhaps the most dangerous finding of all was that there has been a long-term and worsening deterioration in the scope for low-to-middle income households improving their financial or social mobility prospects through remunerated work. UK labour’s share of productivity gains and growth in GNP has been steadily falling in real and absolute terms over several decades (important to note here that ‘labour’ encompasses the middle class professions). I suspect that the exception to this trend will be the chief executive class who have successfully engineered thier own disproportionate share of the ‘remunerated cake’.
    The Resolution Foundation’s findings are supported by a welter of similar evidence from other sources. The TUC in its recent ‘Britain’s Livelihood Crisis’ has seized, legitimately enough, on the evidence of acute and unjustified inequality in earned incomes across UK society. Much of the most accessible evidence is in relation to the housing market in the UK. The Joseph Rowntree Foundation’s 2011, ‘Tackling housing market volatility in the UK ‘ indicates that soon only one in four young couples will be able to afford home ownership. The 2011 survey, ‘The Reality of Generation Rent’, produced by Halifax and the National Centre for Social Research included the statement that: “Two thirds (64%) of the non homeowners we spoke to can be defined as ‘Generation Rent’ – a generation with no realistic prospect of owning their own home in the next five years…”
    All the while the share of national wealth and income has, of course, steadily improved, on all metrics, for that part of the population already in the top quartile defined by income and wealth.
    There is some profound and disturbing ‘writing on the wall’ in all of this. It’s instructive to recall that the catastrophe which overcame 20th century inter-war Germany came about when the ‘respectable’ working class and the middle class found themselves, their families, and their place in society, destabilised and impoverished – and themselves rendered powerless by a debauched political class.