Dan Alpert's Two Cents

Please, Listen to the Man

Once again, the colossus of classical economic common sense and the greatest financial regulator of the post-war United States has stepped in to a politically untenable situation and insisted that what is needed, must be so.  A young and inexperienced president is finally heeding the advice of his elders, a group of those well past the point of having any agenda other than to avoid breathing their last with their beloved nation in potentially as bad an economic shape as it was when they were coming of age in the 1930’s.

Paul Volker, whose writing and opinion we have cited countless times in our own commentary on the bubble era and the ensuing financial crisis, has been unrelenting in his, until today, under appreciated efforts to build consensus not for “change” for the sake thereof – but for a restoration of sanity.  He certainly could be reasonably confident in his recent endeavors that the half measures promoted by some nearly half his age, would ultimately prove insufficient.  But the irony profound that, for the second time in Mr. Volker’s career, a first term president has – at a time of his sinking popularity for having committed the most heinous political sin of over-promising the American people, and under-delivering – has turned to him in acquiescence, and accepted his harsh prescriptions.

Just as Ronald Reagan, who was being excoriated as a false savior – a year into his first term – because of the failure of a disastrous economy to cure itself, was forced to listen to then Fed-Chairman Volker thirty years age and silence the Reagan administration’s careerists and its partisans in Congress, while Mr. Volker went ahead and raised the Fed funds rate to 20% by mid-1981, so has Barack Obama – currently backed against the ropes – finally stepped forward and listened to the man….and not a moment too soon.

This president, and the professional economists and technocrats in his administration, can certainly be accused being tone deaf to the feelings of their own constituency (to say nothing of the other side of the aisle) and far to concerned about being perceived as rocking the boat relative to the economy, regulation, banking reform and jobs, when that is exactly what the American public elected Obama to do.

The American people thought they were electing a man who triumphed over the superficialities of race in the way that FDR triumphed over polio.  Instead, they got a Jimmy Carter technocrat who seemed to think that executive leadership emanates from Congress.

The proposal today, and the details have not yet been released in full, to move back in the direction of sound firewalls between trading activities, on the one hand (and possibly underwriting, although at this writing we aren’t sure how that will be covered) and the business of federally chartered depository and commercial banking operations, is important and badly needed.  It will also be massively unpopular with the financial services industry and their retainers in Congress.

Interestingly, the maestro of the cacophonous Efficient Market Theory band, Alan Greenspan – Mr. Volker’s successor – has been so reluctant to admit that the plumbing of regulation needs to be severely reworked, that they have fallen back to the issue of size.  Size per se is not the issue.  It never has been.  The issue is what activities federally chartered and guaranteed depository institutions should be permitted to do to make money.  Limits on additional consolidation are not as important as limits on imprudent activity.

Intelligent regulation is key to the management of an orderly capitalist system.  The absence of regulation is an invitation to what we have just experienced.  We should have a spirited debate on these matters – but at the end of the day, we must listen to Mr. Volker.

One Response to “Please, Listen to the Man”

Barry W. ShookJanuary 22nd, 2010 at 9:25 am

Someone else, beside Obama, is on the right track. The comments in this article are good and relavent, and track well with history. The voters will deal with the “retainers in Congress”. Both the House and the Senate are due for a big overhaul.