Ex-Federal Reserve Chair Paul Volcker: Government Should Stop Financing Mortgages

Former Federal Reserve Chairman Paul Volcker is advocating for regulatory control over the money-market mutual fund industry and believes the government should stop financing mortgages.

Volcker said in a recent speech that money market funds have exacerbated stress in the financial markets because they pulled back on short-term lending to European banks.

If money-market funds are to continue providing significant funding to regulated banks, they should be subject to capital requirements, deposit insurance protection and stronger oversight of their investments, Volcker said.

"The time has clearly come to harness money market funds in a manner that recognizes both their structural importance in diverting funds from regulated banks and their destabilizing potential," Volcker said in a speech last month that was highlighted by The New York Times on Saturday.

The speech, titled "Three Years Later: Unfinished Business In Financial Reform," also criticized the government's role in the U.S. mortgage market through government-sponsored enterprises Fannie Mae and Freddie Mac.

Today, he noted, the U.S. residential mortgage market is almost entirely dependent on financial support from taxpayers. The federal government placed those entities into conservatorship in 2008 and has funded hundreds of billions of dollars' worth of losses on their mortgage portfolios.

"It is important that planning proceed now on the assumption that Government Sponsored Enterprises will no longer be a part of the structure of the market," Volcker said.

In his interview with the Times, Volcker acknowledged that it will take time to remove government support from the mortgage market, which is still struggling to repair itself, but said policymakers now have "an opportunity to get rid of institutions that shouldn't exist."

Volcker's opinions are highly regarded among some economists and regulators and he was a top adviser to President Barack Obama on financial regulatory reform.

But a measure he championed to restrict banks' ability to bet with their own capital, now known as the Volcker rule, has become a target for financial industry lobbyists seeking to blunt its impact on Wall Street profits.

(Reporting by Lauren Tara LaCapra in New York, editing by Maureen Bavdek)

Copyright 2011 Thomson Reuters. Click for Restrictions.

Comments

[sfumato12]

12:26 AM on 10/26/2011

Nine reasons to abolish the Fed:
1. It has caused every single boom and bust that has occurred in this country since the bank's creation in 1913
2. It is directly responsible for the U.S. debt, the perpetual deficits, and the advancement of the welfare/warfare state
3. It is able to collect perpetual interest on money created out of thin air and the government is able to collect a hidden tax from inflation
4. It savages savers and punishing low income people trying to buy food and fuel
5. It subsidizes reckless risk taking on Wall Street and created the monster that is Too Big To Fail
6. The value of the dollar has been falling ever since the creation of the Federal Reserve. An item purchase for $20 in 1913 would cost $458 today. That’s a 2200% rate of inflation change
7. Setting artificially low interest rates are dangerously counterproductive. It encourages people to borrow more, but save less
8. A partial audit of the Federal Reserve, pushed for by Congressman Ron Paul, found that $2 trillion dollars had been sent overseas to bail out banks in Europe
9. A recent GAO report detailed 18 specific conflicts of interest involving top executives of corporations and financial institutions using their influence as Federal Reserve directors to financially benefit their firms

[robertogt]

12:51 PM on 10/25/2011

Anybody see the irony in this? Freddie/Fannie were originally federal institutions with regulations. Then they were privatized, looted and turned back to the feds(taxpayer). Pretty slick eh? Volcker needs to advise the govt to start prosecuting the perps on Wall Street and the Fed. That won't happen. He, as well as Congress and Obama have a "vested" interest.

[Lili Wanders]

09:18 PM on 10/24/2011

The Federal Reserve in whole needs to be disbanded. If those that work to serve the Federal Reserve cannot be trusted in their personal financial transactions, what makes anyone think they can be trusted overseeing trillions of dollars?

http://dailybail.com/home/is-stephen-friedman-guilty-of-insider-trading.html

[Seymoreclearly]

04:10 PM on 10/24/2011

Volker needs to shut his trap. The Fed has lost all credibility as far as I'm concerned. They seem to exist solely to enrich those who fomented this worldwide crisis in the first place.

What Volker should be preaching is "no more bundling of consumer debt & reselling as CDO's, CMO's, and any other kind of bond issues where the rules are rigged, the consumer is skarewed, and the bankers make out like bandits. That's what happened here. Volker should be calling for some heads to roll & until he points his finger at some of these global crooks, he can pound sand like the rest of the Fed's men & women who fell asleep on the job & now want to blame everyone BUT those who are truly responsible.

[cmscherb2]

04:09 PM on 10/24/2011

First, Fannie and Freddie are not government even though they are GSE's backed by the government. Second, Fannie and Freddie provide the stability, liquidity, and accountability standards the mortgage industry desperately needs. Third, the practice of Fannie and Freddie buying back worthless mortgage based securities to bail out banks is a threat to all taxpayers.This needs to be stopped.

However, the practice of buying equity backed prime mortgages on the secondary market is a vital role of Fannie and Freddie that stabilizes and invigorates the mortgage industry and leads to millions of jobs. In fact they created the mortgage industry. Securities of these types will always have substantial value even in bad times. Fannie and Freddie should only guarantee market value.

The slicing and dicing of sub-prime security instruments creates securities whose value can go to zero. Fannie and Freddie should leave this business and its inherent risks to the private sector. Volcker knows this and should say it.. The bank beloved credit default swaps, not the taxpayer should be the only backstop for losses and risk to the financial industry.

We need to get used to the idea that big banks can fail. The sooner they fail and go through structured bankruptcy requiring new management, the sooner we can pick up the pieces and move on. After a few such failures, the banking industry might push for something like a Glass-Stegall firewall to protect their core functions and management. We've seen stranger things.

[ArchbishopBenevolent]

03:46 PM on 10/24/2011

Government guarantees encourage gambling and highly leveraged Ponzi products by Wall Street and London banksters. It is time to get rid of government guarantees ranging for mortgages, 30-year Treasuries, agricultural subsidies and bailouts.

[albant]

03:41 PM on 10/24/2011

"and believes the government should stop financing mortgages."

So, government can go on financing wars.

[The ORF in Largo]

03:41 PM on 10/24/2011

The Fed should be abolished and the TBTF banks should have their charters revoked.

[lcr999]

03:18 PM on 10/24/2011

If banks were loaning their own money at their own risk, they would be a lot more careful about who they loan to and about feeding bubbles.

[ProgressivesLoveAmerica]

03:31 PM on 10/24/2011

you hit the nail on the head:

You know why banks loved derivatives trading and CDO's then...They explicitly say that it re-allocates risk.

But where does it move that risk to?

Ultimately to the American people:

Socialized risk and privatized profits...

[ReaItors Are Liars]

03:14 PM on 10/24/2011

And after Freddie and Fannie get put to bed, let's finally get rid of the ridiculous mortgage interest tax deduction.

[barbarianatthegate]

03:12 PM on 10/24/2011

"Volcker's opinions are highly regarded among some economists and regulators and he was a top adviser to President Barack Obama on financial regulatory reform."


Too bad big O didn't bother to heed any of Volcker's advice.

[Carolab]

02:48 PM on 10/24/2011

Hogwash.  The GSEs operated just fine until the vultures changed the rules.  Most of these toxic loans on the GSE's books were originated in the private market and then became public debt.  If you look at the statistics on "government backed loans" originated by the GSEs the rates of default are by far lower than those that originated in the private market. The GSE standards precluded the underwriting of subprime loans.

Further, a huge number of bad loans were sold to speculators and people who bought vacation homes (not to mention those who acquired second mortgages/ "equity loans" or HELOCs).

During 2006, 22% of homes purchased (1.65 million units) were for investment purposes, with an additional 14% (1.07 million units) purchased as vacation homes. During 2005, these figures were 28% and 12%, respectively. In other words, a record level of nearly 40% of homes purchases were not intended as primary residences.

The Financial Crisis Inquiry Commission reported in 2011 that Fannie & Freddie "contributed to the crisis, but were not a primary cause." GSE mortgage securities essentially maintained their value throughout the crisis and did not contribute to the significant financial firm losses that were central to the financial crisis. The GSEs participated in the expansion of subprime and other risky mortgages, but they followed rather than led Wall Street and other lenders into subprime lending.

It was securitization that drove this crisis. 

Securitization accelerated in the mid-1990s. The total amount of mortgage-backed securities issued almost tripled between 1996 and 2007, to $7.3 trillion. The securitized share of subprime mortgages (i.e., those passed to third-party investors via MBS) increased from 54% in 2001, to 75% in 2006

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

Government regulations precluded Fannie and Freddie from buying mortgages that didn't meet downpayment and credit requirements. However, as the mortgage market changed, so did their business. Between 2005-2007, few of the mortgages acquired were conventional,fixed-interest loans with 20% down.

It is critical to understand, however, that because of regulations, they took on less of these loans than most banks. According to several analysts, they increased their acquisition of these loans to maintain market share in what had become a very competitive market.

Even so, by 2007 only 17% of their total portfolio was either either subprime or Alt-A loans. Due to regulations, their percentage of these loans are actually better than many banks.

http://useconomy.about.com/od/criticalssues/a/Fannie_Cause.htm

[Darlie Brewster]

02:55 PM on 10/24/2011

Exactly!

[Carolab]

03:39 PM on 10/24/2011

Thank you and fanned.  I am s-ick of the disinformation on this topic.

Maybe if someone did a FILM about it we could clear up the misconceptions.

It's a fact that since at least 2003 the Heritage Foundation has been lobbying to get rid of Fannie and Freddie.  I remember well watching their "performance" on C-Span one day and my antennae went up, way up.  Just Google it, you'll find many examples of their prop-aganda.

[Darlie Brewster]

02:41 PM on 10/24/2011

IT was a republican scam. Redling is over charging poor people it doesn't force banks to give out loans. They could have sued the government if that was the case because it is a responsibility to their shareholders to make a profit. I is called "fiduciary duty". The banks sold off the risk ,had Goldman Sachs bundel them into securities , then they all bet they would default using derivatives, they couldn't care less what happened because the made their profit . Then they went on the stock market and bet against their own loans would default. TRY AND TAKE THE GOVERNMENT TO COURT, I DARE YOU! No one forced the banks to do anything, it was an intentional scam and they knew the result.

Suckers that we are we not only got raped by them , we bailed them out for raping us.

[lonewolfwisconsin]

02:05 PM on 10/24/2011

Agreed.

[ReaItors Are Liars]

02:05 PM on 10/24/2011

Prices are headed down nicely but still have a long way to fall.

Why buy a house today when you can buy later for 60% less?