Volcker on Volcker Rule, Regulation
The New York Times has an excellent in-depth interview with Paul Volcker, the former chair of the Federal Reserve, an advocate for the current financial regulatory reform bill — which will likely pass the Senate and become law toward the end of this week — and the author of the Volcker Rule, banning banks from making risky bets on their own behalf. The entire article is worth a read, but I’ll pull a few particularly interesting passages out.
Here, Volcker — who criticizes the bill but says he ultimately supports it, and calls it an overall “B” — notes that real reform will depend on regulatory enforcement, and regulatory enforcement will depend on having good regulators.
“The success of this approach is going to be heavily dependent on how aggressively and intelligently it is implemented,” he says, emphasizing that a new, 10-member regulatory council authorized by the bill will have to be vigilant and tough to prevent the nation’s giant banks and investment houses from pulling America into yet another devastating credit crisis. “It is not just a question of defining what needs to be done, but carrying it out in practice, day by day, bank by bank.”
Second, he not-so-subtly criticizes Alan Greenspan, a free-market advocate and his successor at the Fed, under whom most deregulation happened.
His replacement, Alan Greenspan, openly campaigned to weaken and finally repeal Glass-Steagall, and President Bill Clinton signed the repeal into law in 1999. Although Mr. Volcker opposed the repeal, he didn’t go public with his concerns. “It is very difficult to take restrictive action when the economy and the financial markets seemed to be doing so well,” he says of his silence at the time. “But eventually things blew up.”
He also says he failed to anticipate just how wild things would become, post-Glass-Steagall: “Those were the days before credit-default swaps, derivatives, securitization. All of that changed the landscape, and now some adjustment must be made.”
In retrospect, Mr. Volcker regrets not challenging the widely held assumptions that underpinned much of this. “You had an intellectual conviction that you did not need much regulation — that the market could take care of itself,” he says. “I’m happy that illusion has been shattered.”