Paul Volcker on the Economy

An interesting interview with Paul Volcker…..

Technorati Tags: Paul Volcker, Economy

Letters to the Editor – Restore Glass Steagall

Interesting commentary.    Let me explain a bit:

• Glass Steagall is the act that separated investment banking from “regular” banking after the Great Depression.
• It was repealed in 1999 – because it was “different this time.”
• As Yves Smith at Naked Capitalism has called it, the separation of Casino Banking from Traditional banking.

Now we’ve got at least three people:

• The former chairman of the Federal Reserve
• The current English equivalent to Ben Bernanke
• A former chairman and CEO of Citigroup

All saying that we need to separate the big institutions so that the risks that are taken by the Morgan Stanleys and the Merrill Lynch’ of the world don’t jeopardize the First State Banks of the country who have the deposits of the general population.

I’m not sure I’d bet against these three, would you?

Tom Vanderwell

Letter – Volcker’s Advice – NYTimes.com

Re “Volcker’s Voice, Often Heeded, Fails to Sell a Bank Strategy” (front page, Oct. 21):

As another older banker and one who has experienced both the pre- and post-Glass-Steagall world, I would agree with Paul A. Volcker (and also Mervyn King, governor of the Bank of England) that some kind of separation between institutions that deal primarily in the capital markets and those involved in more traditional deposit-taking and working-capital finance makes sense.

This, in conjunction with more demanding capital requirements, would go a long way toward building a more robust financial sector.

John S. Reed
New York, Oct. 21, 2009

The writer is retired chairman of Citigroup.

Volcker and Government Programs – what does it mean to interest rates?

Okay, here’s basically what Paul Volcker is saying:

• The government needs to start unwinding the “bailout” programs that it has done and it needs to do that before it looks like they need to, not after we can all see that we need to.
• If we wait until we can see that we need to do it, it’s too late and the problems are going to get out of control “on the other side.”
• He’s got a lot of credibility in this area because he is the guy who gets credit for stopping inflation back in the early ’80’s but he had to raise rates to 20% to do so.

So what does that mean to interest rates?   Particularly the rates that we’re most concerned with, mortgage rates?

A couple of thoughts:

• If the government unwinds their programs (the free money, the ultra low interest rates, etc.) in a systematic and measured response and starts doing so before inflation becomes an issue, I expect that we’ll see interest rates go up by a substantial but rational amount.
• If the government doesn’t unwind their programs until after inflation becomes an issue, then we’re going to see the entire interest rate market get hammered and we’re going to see the Fed have to raise short term rates a LOT higher than they would if they have a reasoned and proactive approach to it.   This in turn will put a LOT of upward pressure on mortgage rates and I expect we’ll see rates that will make us long for the days of 6 and 7% rates again.

Let’s face a couple of realities of the markets:

• Money can’t stay “free” forever.   Rates are going to go up – the only question is by how much.
• When someone borrows money, they eventually have to pay it back.
• The greater the risk of inflation, the higher the rates are going to be.
• The more proactive the government is fighting inflation, the lower rates are going to be.

If you want to talk about this or about anything else, feel free to call me at (616) 292-7559 or e-mail me at tvanderwell@straighttalkaboutmortgages.com.

Thanks,

Tom Vanderwell
Fed Can’t Wait Too Long for Policy Shift: Volcker – General * US * News * Story – CNBC.com

The enormous amounts of liquidity pumped into the U.S. financial system by the Federal Reserve are not inflationary “at the moment” but will become so at some point, Paul Volcker, the former Fed chairman and a White House adviser, said on Thursday.

Volcker, now an economic adviser to President Barack Obama, said it was difficult, but necessary, to start draining the billions of dollars in liquidity even while unemployment rates remained high as the U.S. battles out of recession.

“You have to act against what seems like common sense. If you wait, it’s too late,” Volcker said while answering questions after a speech on financial markets at Harvard University’s Kennedy School of Government.

Volcker is best known for bringing down raging inflation in the United States after he was appointed Fed chairman in 1979 — chiefly by pushing the federal funds rate, the central bank’s key policy tool, to a peak of 20 percent in 1981.

Technorati Tags: Interest Rates, Mortgages, Paul Volcker

Saturday Night Massacre – by New York Times

This Month in Business History: Saturday Night Massacre – New York Times.

An interesting read on what Paul Volcker did on a Saturday in October in 1979 to solve the economic problems that were facing our country then.

Given it’s a Saturday night and he’s in the news again, I thought it would be worthwhile to pass it on.

Tom Vanderwell

Thanks to Barry at The Big Picture for pointing it out.