Paul Volcker Christopher Lane
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FDR signing the Glass-Steagall Act in 1933 Bettmann/Corbis
There has been chatter in recent months about Paul Volcker, the chairman of President Barack Obama's Economic Advisory Board, being muffled by the Administration—especially when it comes to his views on bank regulation. But that hasn't stopped Volcker from taking his argument for separating commercial and investment banking on the road, scolding bankers in Britain in early December and telling politicians in Germany that "this is no time for a return to business as usual." The former Fed chairman has also been hard at work leading a panel that will report back to the President early next year with proposals for tax reform. And at 82, he recently got engaged. We talked at Volcker's Manhattan apartment on Dec. 29.
What will economic growth look like in 2010?
Economists are terrible at forecasting, but it's going to be a slog. The most recent figures are a little bit better than we would have expected, but that doesn't mean they're very strong.
And jobs?Jobs are going to be slow to recover.
A permanent loss of jobs?No, we shouldn't have a permanent loss of jobs, but we have a considerable adjustment process to go through here. We've got to restore investment, we've got to restore our manufacturing industry, not the old-fashioned manufacturing industry, but we have to do a better job at the new industries that are coming along—the so-called green economy. Other countries are ahead of us in production that's related to change.
How did that happen?What happened is our best and brightest got attracted to Wall Street. You've read about those big bonuses. These are generalizations, but I do think that the pull of Wall Street on bright young people, ambitious young people, has been tremendous.
Will it change?I think we're in the process of change now. Wall Street hasn't got quite the glamor that it had a few years ago.
Yes, but I hear bonuses are coming back.Well, I hope you'll get more competition on Wall Street and get some reforms, and profitability won't seem quite so great. At one point, Wall Street had almost 40% of all the profits in the country. And, you know, its contribution to the welfare of the country does not approach 40%. Something's out of line here.
Let's talk about the financial system. You have said it failed the test of the marketplace.Yes. It collapsed on us. And I think that's the test of a financial system—is it facilitating reasonable stability and growth? No, it's had a breakdown at great risk to the economy. It became dysfunctional, and it is still largely dependent upon government assistance.
How should we create a well-oiled financial system?The kind of reform I've been advocating is acceptance of the fact that the core of the system remains commercial banking. If that breaks down then you have an enormous crisis. And commercial banks have expanded into areas I don't think are so central. I would cut back their so-called capital market activities—hedge funds, equity funds, commodities trading, trading in derivatives. They're all legitimate functions, but they're not so central. And I don't want to protect all those functions. I don't want to protect everybody because when people act like they're protected, you get in trouble. So let's leave the capital markets to their own devices without any expectation of government protection and keep the existing safety net for the commercial banking system.
In my judgment we don't need to regulate the capital markets so heavily. You have some extreme cases where individual institutions are so big and so vulnerable, yes, you might want some regulation of capital and leverage, but that would be the exception. But if they fail, let 'em fail. We will have some kind of a new resolution process. Some agency will go in there and say, "You're going to fail, but we're going to provide a more orderly exit."
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