“Paul Volcker Is Back And He Warns Of Tough Times Ahead”
So reads the LA Times headline. His views echo my posts of late:
“It is the United States as a whole that became addicted to spending and consuming beyond its capacity to produce,” Volcker lectured the Economic Club of New York in April. “It all seemed so comfortable.”
Bringing consumption back in line with income would not only crimp individuals and families, but also require major readjustments in the global economy, which has relied on the U.S. as consumer of last resort.
…
It seems likely that he will advise Obama that the growth of U.S. consumption — everything from government spending to household outlays — should not be financed by selling ever larger amounts of debt to foreign interests.
It should be noted that Volcker is very skeptical of “financial engineering” which means that he won’t be for trying to juggle a complex series of international packages like I detailed here. Moreover, it means he feels that the financial industry should go back to it’s 2×2 model, i.e. if you make good loans at 2% profit, you can be at the golf course by 2. Running a bank should be one of the easiest jobs in the world to make money and really it only gets undone by greed. However, if this old fashioned view is adopted it means that leverage and credit will be much harder to come by in the decades ahead, which will take some time to get used to.
It will be interesting to see how Obama juggles his advisors with official power like the Sec. of Treasury, and the new advisory council headed by Volcker. I’ve read that the rumor is Obama kept asking Volcker to be Sec. of Treasury but Volcker’s wife wouldn’t let him because of health concerns. On one hand you have many of his advisors trained in all the new models of finance and global trade while Volcker is old fashioned; on the other, those same models helped get us into this mess while Volcker has a proven history of providing monetary policy leadership.
I actually think that Obama has a good political style for navigating through the crisis but will get a lot of criticism. Regardless of what people say, I don’t think that acting on these matters right now or we’re all going to die is really of the upmost importance. Sure, if the government lets something fail then it will go down in history as that being the cause for future pain (like the Lehman Bros. bankruptcy) but that’s akin to being in the middle of a battle where millions of bullets are flying and then blaming the guy that shot you when you get hit. The solution is to resolve the battle itself and that is far more of a strategic and long term goal.
If he uses these diverse viewpoints to move methodically but efficiently, Obama has a lot better chance of getting things right. On the political side, this will entail providing leadership and asking for people to work together for a common sense of purpose in a way that we haven’t been asked in quite a while [as a country and never personally at least in a non-military role].
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4 Responses to ““Paul Volcker Is Back And He Warns Of Tough Times Ahead””
It'll be interesting what these guys do. To what extent are they still conditioned by the earlier inflationary era and concern with inflation versus how they may now view deflation in Japan and how we might face the same thing. (Also what would they think of Europe and Europe's own concerns, including dealing with a number of “sub-economies” some of which have already threatened to be deflationary versus less disciplined economies that to now have still caused concerns about inflation.)
I'm intrigued at the prospect of change, concerned as others are about the current removal of limits and even inhibitions on governmental intervention of all kinds, with likely more such ambitions to materialize later. (Not only strictly economic goals with a political nature but blatantly political goals like environmentalism, the current darling.)
The bit which is implied but not actually spelt out by Volcker is that in the process of “spending and consuming more than they produce” the people of the USA have borrowed the balance. To make matters worse a great deal of this spending has either gone up in smoke or ended up around their waistline. There is precious little to show for this lifestyle other than a Disneyland landscape of MacDonalds, Golf courses, bowling alleys, big cars and ……the list goes on. The best thing that the USA can do for its people is to announce that after 2030 there will be no social security or Medicare. Everyone will have to make provision for their own health and retirement. Watch the emphasis go from spending to saving in a twinkle. Volcker is right that spending has to come back in line with income. My friends recently came back from a trip in the States and they are still shaking their heads at the largesse they were confronted with.
Yes, a lot of borrowing as well as spending that I've been seeing has been for ordinary expenses, often discretionary expenses, with a credit card not out of immediate necessity (in lieu of cash on hand) but out of habit. AT lunch today I actually saw someone with me do this to buy a sandwich.
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