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Monday, December 08, 2008

Volcker Warns of Tough Times Ahead

by Calculated Risk on 12/08/2008 02:09:00 AM

From the LA Times: Paul Volcker is back, and he warns of tough times ahead

In speeches, interviews, public policy reports and congressional testimony, Volcker, 81, has laid out a fairly clear outline of what he thinks is wrong with the present-day financial system and the government's management of the economy.

His concerns go to the very core of how America lives and how Wall Street operates. A child of the Great Depression and a man of legendary personal thrift, Volcker thinks Americans have been living above their means for too long.
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.
Volcker has become a skeptic of modern Wall Street, worried that the nation's entire financial system has evolved to a point that the government no longer has effective control over all of its important components. And the financial industry has become beholden to complex financial engineering that clouds the picture.

"The market was being run by mathematicians who didn't know financial markets," he said this year after the crisis struck.

Clearly, he wants tough new regulations on securities markets, including oversight of hedge funds, in order to avoid the need for a bailout effort by the Fed ever again. 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.

But he warns people not to expect an easy ride. "It's going to be a tough period," Volcker said in a speech at the Urban Land Institute in late October. "But when we dealt with inflation, it laid the groundwork for 20 years of growth. I'd like to see that happen this time."
This article is mostly a compilation of various Volcker speeches and testimony. The article concludes:
"The only reason I sleep at night," said a longtime friend and business partner of Volcker's, speaking on background, "is that Paul Volcker will have the president's ear."