Whenever Barack Obama wants to establish some street cred (that's wall street cred) on economics, he trots out Paul Volcker for a photo op. But when it comes to actually implementing Volcker's financial policy proposals -- particularly his common sense proposal to restore the separation between federally insured commercial banks and investment banks/hedge funds which make risky bets in the global financial casino, while keeping the profits when they win and being bailed out by the government when they lose -- the Obama administration has either been undermining or bizarrely ineffectual.
Standing 6'7" tall and looking like a banker straight out of central casting, Volcker makes a terrific prop.
Volcker is no one's idea of a progressive. When he was Chairman of the Federal Reserve, he may have done more than anyone on earth, other than the Ayatollah Khomeini, to cause the defeat of Jimmy Carter and the election of Ronald Reagan by jacking up short-term interest rates to nearly 20% and causing unemployment to temporarily skyrocket above 10% in order to ring inflation out of the economy. Ironically, Volcker's recent calls to restore the separation of federally insured commercial banks from risky investment banks/hedge funds have, in relation to the Obama administration, placed him on the far left-wing of acceptable debate on financial policy.
Obama and his advisors worked hard to gain Volcker's backing for his Presidential campaign, and when they succeeded fairly early on in January, 2008,
Volcker brought instant credibility to President Barack Obama's 2008 presidential campaign. His weighty experience helped dispel the notion that Obama lacked the economic credentials to become chief executive during the worst economic crisis since the Great Depression...In a pivotal moment in the final 2008 presidential debate, Sen. John McCain questioned the associates of the junior senator from Illinois, a persistent campaign them. 'Let me tell you who I associate with,' Obama told McCain. 'On economic policy, I associate with Warren Buffet and former Fed Chairman Paul Volcker...who have shaped my ideas on who will be surrounding me in the White House.'
As the Wall Street Journal put it 3 weeks before the election,
Mr. Volcker delivers gravitas and credibility to Sen. Obama...'Volcker whispering in Obama's ear will make even Republicans comfortable, because he's a hero of the right and a supporter of a strong dollar,' says John Tamny, a supply-side economist and Republican.
In the crucial week of September 24, 2008 when markets seized up and John McCain pulled the self-destructive stunt of "suspending" his campaign to supposedly deal with the crisis, Obama called a meeting of his economic advisors. He conspicuously seated Volcker next to him for a photograph by the media entourage. This may have been the turning point of the campaign, cementing Obama's image as cool under crisis and backed by an economic team capable of handling the situation. Volcker's presence was key to this and may have been instrumental in making Obama President.
During the campaign, Volcker was on speed dial on Obama's cell phone and his staff routinely reviewed policy proposals and speeches with Volcker.
But when it came time to govern, as Newsweek's Jonathan Alter points out, "Volcker was frozen out of the Obama administration." (Also frozen out were other more liberal economic advisors to Obama's campaign like Nobel Laureate Joseph Stiglitz and former Clinton Secretary of Labor Robert Reich.)
"After hearing from Obama often during the campaign, Volcker's phone stopped ringing. He wryly told friends he has nothing more than a 'wax figure' for the White House."
As Volcker told another reporter, "I'm just a photo op."
The Washington Post reported,
For much of last year, Paul Volcker wandered the country arguing for tougher restraints on big banks while the Obama administration pursued a more moderate regulatory agenda driven by Treasury Secretary Timothy F. Geithner...Volcker had been arguing that banks, which are sheltered by the government because lending is important to the economy, should be prevented from taking advantage of that safety net to make speculative investments.
In an unusual left-right alliance, in December, 2009 Republican John McCain and Democrat Maria Cantwell introduced a bill that would implement some of Volcker's ideas by reinstating many of the provisions of the 1933 Glass-Steagal act that separated federally insured commercial banks from investment banks and hedge funds, but was repealed under Bill Clinton with strong backing from Larry Suumers. The While House opposed the bill and prevented the House version from getting an up or down vote. Similarly, when the bill was attached as an Amendment to the Senate Financial Reform bill, the White House worked with Harry Reid and Chris Dodd to prevent it from getting a floor vote in the Senate.
Then in January Republican Scott Brown won Ted Kennedy's old Senate seat and the White House went into a political panic. Two days later, President Obama pulled Volcker off the shelf and positioned Volcker at his side for a White House announcement that Obama was now determined to include what Obama called "The Volcker Rule" in the financial reform bill. Referring to the megabanks who engaged in proprietary trading for their own account, Obama boldly proclaimed, "If these folks want a fight, it's a fight I'm ready to have."
In March, the White House proposed specific legislative language to implement the Volcker rule. The proposal specifically prohibits a bank or institution that owns a bank from engaging in proprietary trading that isn't at the behest of clients, and from owning or investing in a hedge fund or private equity fund, as well as limiting the liabilities that the largest banks could hold.
But despite the fanfare, the Obama administration has been bizarrely ineffectual getting the Volcker rule into the financial reform legislation. As prominent financial blogger Yves Smith observed,
The Volcker rule is following the tried and true path of all Obama 'reforms', meaning an idea announced with great fanfare is being whittled back to meaninglessness.
Despite Obama's promise that he was ready for a fight, he didn't even manage to convince Democratic Senate Banking Chairman Chris Dodd to include the Volcker rule in the Democratic financial reform bill voted on by the Senate. Instead, the bill calls for regulators to spend the next two years "studying" how proprietary trading by federally insured banks should be handled, a sure death knell for any action. When Democratic Senators Carl Levin and Jeff Merkley, with numerous Senate supporters, brought up an Amendment to the Senate version of the financial reform bill to implement the Obama administration's proposals on the Volcker rule, the Democratic leadership under Harry Reid and Chris Dodd could not even find a way to allow it be voted on during the period amendments were being considered.
Some fight. Does anyone really think that if the President really wanted the Volcker rules included in the financial reform bill, he couldn't have twisted arms to have Chris Dodd include it in the original Senate bill, or to have Dodd and Harry Reid bring the Merkley-Levin Amendment up for a vote? Or was the whole thing just a charade?
The final opportunity for including the Volcker Rule in the final financial reform bill now moves to the Senate-House conference committee. On Thursday, Treasury Secretary Tim Geithner's chief Treasury Department deputy Neal Wolin gave a speech proclaiming that in the conference committee, the Obama administration
If Obama couldn't manage to get the Volcker rules into the original Dodd bill or get Reid and Dodd to bring them up for a timely vote on an Amendment, it's hard to see how they'll manage to revive them in conference, particularly under intense lobbying from the banks to further water down the bill. But hope springs eternal and we will see in next week or two.
Will work hard to include the so-called 'Volcker Rule' provision, which would protect taxpayers and depositors by separating 'proprietary trading' from the business of banking--and in addition, would limit the size of financial firms by preventing acquisitions that would result in a concentration of more than ten percent of the liabilities in the financial system."
The 81-year old Volcker told the Senate Finance Committee that that if speculative activities by commercial banks are allowed to continue at the present pace,"
I may not live long enough to see the [next[ crisis, but my soul is going to come back and haunt you."
If after all the fanfare, photo ops, and promises to fight, the Obama administration shamefully doesn't manage to get the Volcker rules into an already weak financial reform bill, I hope Volcker doesn't wait until the next life to speak out. He should publicly resign in protest as Chair of the powerless President's Economic Recovery Advisory Board to which Obama appointed him in January, 2009. He should refuse to ever again allow Obama to use him as a "wax figure", a "photo op" or a potted plant.
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