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Ex-Fed Chairman Paul Volcker Criticizes the Federal Reserve

by Rainer Sommer Thursday, Sep. 30, 2010 at 8:32 AM

"Altogether the 81-year old Volcker can hardly see anything good in the development of the financial system over the last 25 years."


Iron Federal Reserve principles were broken to the "point of no return"

By Rainer Sommer

[This article published in the German-English cyber journal Telepolis 4/28/2008 is translated from the German on the Internet, link to]

Paul A. Volcker was Alan Greenspan's predecessor as chairman of the Federal Reserve from August 1979 to August 1987. He is still famous today for his very self-confident style as an inflation-fighter. He forced down the inflation rate that had risen to 13.5% in the US in 1981 to 3.2% within two years with key interests of temporarily more than 20 percent and without regard for employment and growth. The result was one of the worst recessions since the 2nd World War and the ruin of many Latin American countries heavily indebted in dollars.

In an address at the annual meeting of the Economic Club of New York on April 8, 2008, he spoke bluntly about his irritation over conditions. He began by comparing the current financial crisis with his time as governor of the New York Fed going back 30 years when the city of New York passed through the most grievous financial crisis of its history and was temporarily insolvent. This was child's play compared with today's financial crisis.

For years, the city lived above its means and the banks profited. This "profitable but shaky" financial structure required the constant extension of short-term debts and was based on the silent assumption that big cities cannot go bust. When New York went bust, Volcker was under great pressure to intervene and activate emergency laws from the time of the Great Depression of the 1930s and help the city out of its misery with Federal Reserve money. Otherwise the whole US financial system would be endangered, it was said.

Nevertheless Volcker resisted. New York had to accept a debt moratorium and submit to the harshest austerity measures. The Fed used its legal and implicit means to the extreme and threw long-tested Federal Reserve principles and practices overboard. [Fed opens the floodgates] This happened through direct awarding of credits to financial institutions outside the commercial bank sector, to investment banks subject to the Securities and Exchange Commission, not to the Fed. This immediate assistance to Wall Street was described by the Fed as temporary. However according to Volcker this assistance was interpreted in the market as an implicit promise for similar bailouts in future financial crises.

The immediate response to the crisis has been to resort to untested emergency powers of the Federal Reserve. Out of perceived necessity, sweeping powers have been exercised in a manner that is neither natural nor comfortable for a central bank. As custodian of the nation's money, The Federal Reserve has the basic responsibility to protect its value and resist chronic pressures toward inflation. Granted a high degree of independence in pursuing that responsibility, the Federal Reserve should be removed from, and be seen to be removed from, decisions that seem biased to favor particular institutions or politically sensitive constituencies.

Paul Volcker

The task of the Federal Reserve is to balance and moderate the enthusiasm and fears of the market. This is very difficult when the markets are shaken by turbulences and recession fears... The public pressure on the Fed to take billions in insecure securities on its balance sheet raises questions that must be answered to oppose inflationary tendencies.

Simply stated, the bright new financial system - for all its talented participants, for all its rich rewards - has failed the test of the market place. To meet the challenge, the Federal Reserve judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending certain long embedded central banking principles and practices.

Paul Volcker

According to Volcker, the task of the Fed has not been to support the housing system but the institutions originally established for this goal like the government-promoted mortgage institutions Fannie Mae and Freddie Mac and the Federal Home Loan Banks which should be provided with government funds. These are also businesses traded on the stock exchange which follow the interests of their shareholders more than the general well-being. Why do they still enjoy state privileges? Volcker asks.

Altogether the 81-year old Volcker can hardly see anything good in the development of the financial system over the last 25 years. Unlike today, the New York financial crisis was preceded by 40 unusual crisis-free years. According to Volcker, the current crisis is only the peak of a development marked by grave financial market crises every five years for 25 years. In this time, the financial system developed from a highly-regulated credit system supported by commercial banks to an enormously complex system in which a large part of awarded credits happened through the unregulated market - embedded in an enormous and unknown number of derivates. This was so profitable that the financial system realized 35 to 40 percent of all US corporate profits before the outbreak of the crisis. However the rest of the United States has not profited according to Volcker. In any case, economic growth and productivity were not higher than before. The prosperity is only distributed less evenly.

Like New York 30 years ago, the whole country has now lived far above its means and was

"addicted to consuming more than could be produced. The result was the disappearance of private savings, rapidly increasing imports and a gigantic trade deficit. Gladly financed by foreign countries, everything seemed very comfortable. No one wanted to change anything, not in Washington that could spend money and still keep taxes low, not on Wall Street which swam in money and not in the population which profited from cheap credits and rising home prices."

Paul Volcker

At the end no financial juggling could maintain the intolerable for ever, Volcker concludes. A painful and necessary correction or reorientation must now be forced on the economy.

Rainer Sommer's book "The Subprime Crisis. How rotten US credits shake the international financial system" is available in German.



Elizabeth Warren: Obama's New Assistant

By Moritz Koch, New York

[This article published in: 9/16/2010 is translated from the German on the Internet,]

Anxiety in Manhattan: The controversial law professor Elizabeth Warren never wanted to be very close to Wall Street and castigated the bank bailout. Now she is one of the most important figures in the new US financial system.

She was a critic, uncomfortable and outside. The Harvard professor Elizabeth Warren urged taming the financial industry when politicians in Washington competed over who had the most friends on Wall Street. That brought her academic recognition and a few ardent supporters.

But she had no influence. The collapse of the US economy first catapulted the 61-year old into the center of power. At the end of 2008 she was nominated the chairperson of TARP, the Senate committee to monitor the government's bank bailout fund. A little later she was famous nationwide. As a defender of the cheated, she was a champion against the legal fraud.

Now Warren should rise again. President Barack Obama wants to make her his special commissioner for consumer protection as several US media announce. The law professor could be one of the most important figures in the new US financial system.

Warren was actually under consideration for chairperson of the newly created consumer protection agency, that new agency for financial reform against the embittered resistance of Wall Street. However the post as agency chairperson would have required the approval of the Senate. The Republicans prepared a blockade.


Warren has made many enemies. Among bankers and republicans, she is regarded as an ideologically blinded or deluded activist. But she is indispensable for Obama. One of the president's weak spots is being identified with the TARP fund in the eyes of the public - even though the bailout parachute for Wall Street was opened up under his predecessor George W. Bush. Warren is one of the most passionate critics of the TARP law. "The idea of pumping money into frenzied financial institutions without demanding massive changes in their management is grotesque," she once railed.

Obama will use Warren in his economic team before the November congressional elections. Not wanting to wait any longer, the president reaches in the legislative bag of tricks. Nominating a special commissioner does not require any confirmation by the Senate. Officially Warren will act as assistant of the president, a title only given to a few top officials in the White House like Obama's chief of staff Rahm Emanuel. Warren will be involved in selecting the chairperson of the consumer protection agency. Later she herself could be nominated to this post.

Warren's adversaries will let her remain. Banks, savings banks and other institutions created cheap money in the years before the crisis, later pointed to the fine print and collected enormous interests. "Studies show that the purposes of credit products were veiled when these products were formed to deceive consumers," Warren said. The consumer protection agency should put a stop to that. The agency is conceived as a kind of entrance gate for new financial products like mortgages and credit cards that financial institutions want to bring on the market. Warren admonishes the banks to cooperation: "This generation of Wall Street chieftains may be the generation that lost America's trust or it can take the first steps to regain that trust." But the financial corporations rant and rave. Soon Americans will learn consumer protection means only higher interests.

How will Warren come to an arrangement with Timothy Geithner, Obama's Treasury secretary? As the former head of the New York branch of the Federal Reserve central bank, Geithner was one of the architects of the TARP law - and thus a main target of Warren's rhetorical passion.


"The Quiet Coup" by Simon Johnson:

"Attac's Bank Tribunal: The Jury's Verdict" by Friedhelm Hengsbach:

"Capitalism Recycling" by Artur Schmidt, 2009:

"Self-Abandonment of the System" by Artur Schmidt, 2009:


Bank lobbyists outnumber reform lobbyists 11 to 1 on derivatives legislation alone.

While many details are still to be ironed out around derivatives and consumer protection, it is clear that the legislation will not break up the massive banks that are blamed for the crisis. Until the banks influence on Capital Hill is broken up or countered, there is no way to guarantee an end to bailouts.

David Arkush, Public Citizen on

link to


William Engdahl: US fights to maintain dollar hegemony at expense of economy

When did the gods of money ever care about their indigenous people? This is a dysfunctional pathological system. "We're simply doing God's work," said Goldman Sach's Lloyd Blankfein. "After us the flood" is not a viable system in the long run.

link to

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