Paul Volcker Slams 'Broken' Financial System, Banks, Regulators

Paul Volcker pulled no punches Thursday in a speech at the Federal Reserve Bank of Chicago, criticizing nearly all aspects of the nation's financial system, which he said is "broken."

The former chairman of the Fed and current chairman of the president's Economic Recovery Advisory Board had harsh words for banks, regulators, business schools and the larger economy. According to the Wall Street Journal, Volcker improvised the remarks, having decided not to read his prepared speech. He called for "structural changes in markets and market regulation."

Investment banks, he said, according to the WSJ, have become "trading machines instead of investment banks [leading to] encroachment on the territory of commercial banks, and commercial banks encroached on the territory of others in a way that couldn't easily be managed by the old supervisory system."

The "Volcker Rule," which was billed as a key component of the recent Dodd-Frank financial reform act, was designed to limit banks' ability to use taxpayer-backed funds to make investments on their own behalf. But the final version of the rule, after being subjected to lobbying and compromise, was weaker than Volcker had intended. He told The New Yorker he was "a little pained that it doesn't have the purity I was searching for."

His critique Thursday didn't stop with investment banks, according to the WSJ. Central banks, he said, became "maybe a little too infatuated with their own skills and authority."

A problem with regulation, he said, is that it relies on human judgment. He also bemoaned regulators' lack of perceived authority, saying that a financier might tell a regulator, "We know more about banking and finance than you do, get out of my hair."

As Bloomberg reported, Volcker said the mortgage system is "absolutely broken," and is the most pressing problem in the current economic situation. "It's going to take a long time to repair the basic disequilibrium in the economy," he added.

Comments

[Law-school-lady]

11:48 AM on 11/04/2010

Paul Volcker is a genius. President Obama, please give this man more power and appoint more people like him to positions of oversight of Wall Street.

[stargazer13]

03:15 AM on 09/28/2010

yeah! we know

Mr Volcker

were screwed !

and then we gave them bonus,s for a job well done !! eeewwwhhhh :(

[MarsAmbassador]

08:28 PM on 09/27/2010

People are broke so they bleat about taxes. But taxes are the lowest they've been since the 50s. The problem isn't with taxes, it's with the lack of disposable income. Which is a result of Corporate America stagnating wages for the past 30+ years. The Real Purchasing Power of an American is HALF of what it was 35 years ago. A single income family had more RPP in 1973 than a dual-income family has today. Inflation has outpaced income and we have all gone into debt as a coping mechanism. Our savings are depleted and yet Wall Street marches on. You want to blame someone for being broke, then blame Corporate America for shipping all our jobs overseas, blame Reagan for dismantling our industrial capacity in favor of a debt-instrument based financial economy that isn't based on actual tangible assets that provide jobs for Americans. America used to produce 80% of the goods on the planet, now China does. Unemployment is high because Wall Street used to invest in America for profits, resulting in jobs. Now they have complex financial instruments that BYPASS that entire system entirely, giving them profits but without having to actually invest in America to do it. Hence the facts they have profits and unemployment keeps rising.

30 years of declining savings:
http://sg.wsj.net/public/resources/images/OB-BJ505_ROI_Sa_20080501170150.gif

George Carlin knew who owned who in this country:
http://www.youtube.com/watch?v=hYIC0eZYEtI&feature=related

[insanityfollows]

10:49 PM on 09/27/2010

Absolutely right on all points.

[dansup]

04:08 AM on 09/28/2010

spot on - one of the best posts yet on the subject - bravo for common sense

[flippypog]

05:24 PM on 09/27/2010

Believe Obama is a lot shrewder than many give him credit for. Despite the fact that the Democrats are finally growing a backbone of sorts, the very fact that Republicans are united in Stepford lockstep just proves they don't have an original thought among them. Let's go down the list:

(1) Privatize SS - pure BS! It's solid for at least three more decades. Tweaking will be required but will be gradually phased in as it should be.

(2) Medicare - eliminating fraud is the answer; also eliminating for-profit medical interests of every kind.

(3) Health reform - great for everyone; look at the details. Only issue? Waiting til 2014 for most of it to take effect.

(4) Wall street and banks - break them up! Antitrust laws should be applied here.

(5) Environment / Infrastructure / Innovation - Marshall Plan to reinvest in America

(6) Taxes - flat tariff on everything incoming; overall reduction in tax rates but also elimination of most deductions, especially the one on mortgage interest and hiding money offshore.

(7) Education - abolish tenure; year-round schools; virtual / online public schooling; send all business taxes towards education.

I could go on but I'm currently unemployed and need to get back to my job search ...

[Jerry Lammers]

03:51 PM on 09/27/2010

Where are Mr. volcker's harsh remarks for the totally inept Federal Reserve. The Fed. first pumped up the bubble, then burst it rather than easing the air out slowly with much less misery. Today, we have a Fed. acting like a deer on the road, frozen in fear at the oncoming headlights.

While the Fed. policy could be worse, they'd have to try real hard to make it so. We have at least 10% unemployment, a net debt of about $9 Trillion, and a structural deficit of about $1 Trillion. With the simple push of the 'magic' Quantitative Easing button, they could improve all these situations simultaneously. I think about $4 Trillion spread over the next two years should do the trick.

This would reduce the real debt by about $2 Trillion and give the goverment a de facto $2 Trillion surplus, rather than a $2 Trillion deficit over the next two years. With the resulting inflation, asset values (including equities and homes) would climb in value. This would allow those who rely on the stock market to determine their economic health would be able to spend more. At the same time, increases in housing values would allow underwater homeowners to refinance at very low rates, freeing up more of their income for alternative consumer spending. These should both contribute to a significant reduction in the unemployment rate.

The value of the nation's $5 Trillion in gold reserves would also swell in value, probably reducing the effectuive debt to zero.

[prock]

08:14 PM on 09/27/2010

Volcker has made it a personal policy not to Monday Morning Quarterback the Fed. He knows it's not an easy job. Nevertheless, he said, Central banks became "maybe a little too infatuated with their own skills and authority." Considering his track record of remaining completely mum, this is a major slam.

Keep in mind that the Fed has been following a policy of easy money since Greedscam started in 1987, and that Bernanke is called "Helicopter Ben" for a reason. The only game they know is dollar devaluation. It's astonishing that we actually have foreign investors in the Dollar at all (but then I guess that's what the biggest military in the world buys you).

[muck-raker]

04:59 PM on 09/29/2010

Jerry for ONLY the last two weeks I been reading about the "FED". Most people had no clue. I did not either...and now I am shocked....printing FIAT dollars with NO backing out of nothing and have US pay interest on it...try this for 3 minutes....and you too will have that glassy stare.

http://video.google.com/videoplay?docid=-515319560256183936#

[tuberider]

11:44 AM on 09/27/2010

The den of thieves can't wait for Volcker to retire. Pebbles in front of a tank.

[rotorhead1871]

09:09 PM on 09/26/2010

I can slam the system, i want this guy to tell me how we are going to FIX it!! with all those high political conections, he better be frikkin superman or batman or some other super hero!! so quit trashing and get busy FIXING!!!!

[prock]

08:23 PM on 09/27/2010

So stripping banks of the power to gamble in the stock market with depositors' money and limiting their size is not enough? Lets face it, the only GOOD strategic ideas to come out of this administration in dealing with the economy have come from Volcker.

Not to discount Elizabeth Warren, but her suggestions of protecting consumers are like tiny little paper cuts against our corrupt financial system compared to the deadly Judo chops Tall Paul is suggesting.

If only we had an ethical Congress with spine tougher than jelly or a brain larger than a dustmite...

[muck-raker]

06:15 PM on 09/26/2010

No man did more to expose the power of the FED than Louis T. McFadden, who was the Chairman of the House Banking Committee back in the 1930s. In describing the FED, he remarked in the Congressional Record, House pages 1295 and 1296 on June 10, 1932:

"Mr. Chairman, we have in this country one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board and the Federal reserve banks. The Federal Reserve Board, a Government Board, has cheated the Government of the United States and he people of the United States out of enough money to pay the national debt. The depredations and the iniquities of the Federal Reserve Board and the Federal reserve banks acting together have cost this country enough money to pay the national debt several times over. This evil institution has impoverished and ruined the people of the United States; has bankrupted itself, and has practically bankrupted our Government. It has done this through the maladministration of that law by which the Federal Reserve Board, and through the corrupt practices of the moneyed vultures who control it".
http://www.john-f-kennedy.net/thefederalreserve.htm

[joebhed]

04:08 PM on 09/29/2010

Hear ye!
Hear ye!

All salutations to the gentleman from Granville Center, Pennsylvania, former banker and President of the Pennsylvania Bankers Association.

[muck-raker]

04:47 PM on 09/29/2010

joebhed....more: http://video.google.com/videoplay?docid=-515319560256183936#

[Andman0121]

11:10 AM on 09/26/2010

Re-introduce Glass-Steagall! Why is this not being talked about??

[bogey1]

01:41 PM on 09/26/2010

shhhhh, bankers might actually have to work for a living instead of gambling

[xlntcat]

02:56 PM on 09/26/2010

Because Glass Steagal didn't cover the "new" financial instruments.  You can do it but it will not provide a silver bullet.

[hellboundtrain]

08:52 AM on 09/26/2010

Is the purpose of the derivative/swap trades business to recast the social order of the world forever?
Isn't that what has been allowed to occur?

[loki]

02:07 AM on 09/26/2010

No true Ivy Greeder gives a steaming heap of elephant dung about what Volker or anyone else says. This is just done for the benefit of us plebeians. Its all a dog and pony show to quell the masses and ease us all into a sense of toleration, thinking that someone in power actually cares.

[NevaforLeadership]

08:25 AM on 09/26/2010

What's your down home prescription?

[bogey1]

01:43 PM on 09/26/2010

bring back Ronald Regan era tax rates, after all don't republicans want regan's face on mt. rushmore? that means he can't have been a pinko, commie, socialist, tree hugging, volvo driving type

[xlntcat]

02:58 PM on 09/26/2010

Oh, you poor, pitiful little thing.  Did your mommie forget your paci?  Now tell us what you have done to improve your on circumstances, those of your neighbors, or the world over the past 18 months.

[rotorhead1871]

09:11 PM on 09/26/2010

probably work....

[BambooBob]

12:15 AM on 09/26/2010

Although I do understand the pessimism expressed in some of the remarks, I think it is great that Volcker is delivering such straight talk. Don't give up hope for change!

[birddogs]

10:48 PM on 09/25/2010

Sadly Paul Volcker is just window dressing. Smart man, sound advice on banking reform but no one who could implement his views is listening.

[xlntcat]

03:02 PM on 09/26/2010

Seems like everyone either forgot or are too uninformed to know how American reacted to Volcker's strong medicine in the 80s.  There was nothing warm and fuzzy about breaking the back of run away inflation.  Volcker did despite being the most hated man in America and it cost him his job.  America has had the identical same response to efforts to put her back on a stable financial course this time so I guess you do get the picture.  Summers, Geithner, Bernanke and yes, Paulsen have been treated like national heros compared to the way America responded to Volcker's iron fist.

[jcaunter]

10:15 PM on 09/25/2010

The rich are getting their taxes cut and regulations gutted, and the American people are getting their golden shower trickled down onto us. Look forward to Obama and the other Democrats gloatingly gutting social security and cutting taxes for the rich just after the midterm elections. That's what they're waiting for you know.

[NevaforLeadership]

08:44 AM on 09/26/2010

We are so intent on slamming greedy Wall Street (not stopping for a minute to remember that Wall Street impacts everything we do) that we forget about greedy government, whether it be Republican or Democrat.

Taxation on anyone is a personal well-being killer.

We need governments for defense, infrastructure, protection, etc. but governments have become involved in far too many businesses. Unfortunately they don't run their businesses as businesses should be run.

As a business person, when I go over budget or don't bring in planned income, I can't go to my customers and levy a tax to keep me going. That is what is wrong with government, and it is evil.

Governments should work within their budgets and reduce costs when they exceed their budgets -- not top up with added taxes.

The most fair form of taxation is a flat tax. A certain percentage for each person and each business. No loopholes. No deductions. That way taxes are kept to a minimum and the rich still pay more. No more three-inch-thick tax acts and codes. No more massive tax-sucking internal revenue departments. No more funds for extraneous spreading government departments, etc.

[Chicagowill]

06:15 PM on 09/26/2010

Even if one were to agree that a flat tax were the "most fair form of taxation", to keep small business owners and sole proprietors from comingling their personal and corporate affairs, the only way to implement it to do what you want to do would be with a VAT.

As for going to your customer and "levying a tax", have you never had a consultant or builder come to you and tell you to pay for an overrun? If so, you are the only person in the country.

As for infrastructure, we have neglected most of it since the last generation was built in the 1950's through 1970's. A lot of the stimulus money was used to bring a small part of that up to date.

[hellboundtrain]

10:01 PM on 09/25/2010

As far as I can tell the rules for creating and working with the derivatives/swaps are very many words and concepts that best fit the dreams of etherealists. As many have said in several different ways, I don't see the reason for these to be around. Who says they must have them?

[HamletsMill]

01:44 AM on 09/26/2010

They must have them because they are incredibly profitable for them. They take the upside. If there is a loss (like in September 2008 with AIG) , the American taxpayer eats the down side as total dupes. What is NOTt to like for them in this arrangement? It is a win-win for them with no end in sight. Ever.

[hellboundtrain]

08:47 AM on 09/26/2010

So the destruction of the worlds' economies is then programmed with the upward flow of all funds assured and all other classes locked into servitude forever.

[exmate]

08:58 AM on 09/26/2010

There is definately a place for derivatives but probably not all of the ones that we have today and they definately should be regulated.

1. Put (expecting price rise in a stock) and call (expecting a fall in price) options are useful for insurance companies who must hold vast amounts of money in order to pay out claims when necessary. Their utility is that while they limit return on investments, they also limit losses. This insures, as it were, that claims can be honored.

2. Futures trading is important for manufacturers who want to lock in the price of some commodity which they will need sometime in the future.

3. When they are functioning properly, derivatives impart sanity and stability to financial markets. People on Wall Street have earned how to game the system.

4. We need to regulate against the practices that have gotten us into our present difficulties

exmate, MD, MBA

[hellboundtrain]

11:10 AM on 09/26/2010

Re: #2. And, if the price of said commodity were not locked in, then the selling price of the item must just be allowed to reflect the real cost of the commodity as it was when it WAS purchased. So, I see no need for the tool.

#3. And, when they are written over everything then the system runs chaotic with dollars being spent to shore up everything. See HamletsMill above, 1:44.

4. Regulation required if they are to occur. The world ran just fine prior to the current iteration.

[HamletsMill]

12:20 PM on 09/26/2010

I agree that there IS a legitimate place for well regulated derivatives. Even Credit Default Swaps have a place among three parties to a deal where one party through due diligence will act as an "insurer" on a financial instrument such as a corporate bond. If they have the reserves to pay and they want to take the risk, fine. If they lose, they take the financial consequences. But NAKED Credit Default Swaps ARE, as Warren Buffet very accurately said, "financial weapons of mass destruction". That is where people with no skin in the game can bet against that deal. It is out and out gambling and was illegal for 100 years until the law changes from1998-2002. It is MADNESS and IT I STILL LEGAL WORLDWIDE! Until this is addressed, this is a criminal financial system. Perhaps the lawsuits about the failure of due diligence on the MBS ratings fiasco will be the mechanism to take this down by lawyers and market forces! THE Federal Reserve and the SEC certainly did not do their jobs in all this. So if these companies can now hang in a court of law, let the games begin. It is a disgrace that NO ONE HAS GONE TO JAIL in this criminal fiasco! So let them now BLEED oceans in lawsuits by the professional Pension and Institutional Funds that were absolutely illegally defrauded by Wall Street.

I am fanning you for a well put post!