United States/United Kingdom
By Gordon Platt
Volcker: Promoting a more conservative banking model
The legendary Paul Volcker, the 6-feet, 7-inches tall former chairman of the Federal Reserve who slew the inflation dragon in the early 1980s, is not afraid to speak his mind. He told a conference of senior bankers in Sussex, England, last month that they should not be so worried that new regulation to prevent future financial crises will stifle innovation. In a tirade that took many by surprise, he claimed that financial innovation has not necessarily fostered economic growth. He added, “You can innovate as much as you like, but do it within a structure that doesn’t put the whole economy at risk.”
Volcker, who is now chairman of President Barack Obama’s Economic Recovery Advisory Board, advocates separating the business of banking from the riskier business of proprietary trading. He says such trading should be pushed out of investment banks and into hedge funds, where he believes it belongs. Deposit insurance and emergency loans should only be available to the traditional banking business, he says.
Volcker also said the Fed needs to be given clear responsibilities and increased powers as the systemic overseer. A few days after his speech, the US House passed legislation that would allow Congress to order the Government Accountability Office to audit Fed activities. The bill also would create a new oversight council, including the Fed, which would look out for developing problems at large financial firms. The Obama administration expressed its approval of the House vote, but action on bank reform in the Senate is lagging far behind.
Volcker recommends a common international approach to major financial reform issues, led by the United States and Europe, but at this point it seems unlikely that he will be able to save the world from disaster for a second time in his illustrious career. He says he gives the best advice he can, but in the end, the decision is not his to make.