Another Sign That Volcker is Marginalized (And a Preview of His Program)

Last week. Bloomberg reported that Volcker, who many regard as the best asset on Obama’s economics team, is sorely underutilized:

Paul Volcker has grown increasingly frustrated over delays in setting up the economic advisory group President Barack Obama picked the former Federal Reserve chairman to lead…

Volcker, 81, blames Obama’s National Economic Council Director Lawrence Summers for slowing down the effort to organize the panel of outside advisers….Summers isn’t regularly inviting Volcker to White House meetings and hasn’t shown interest in collaborating on policy or sharing potential solutions to the economic crisis,

The usual denials ensued. But a story that corroborates this picture comes from the Globe and Mail, courtesy reader Marshall. Volcker is very much in favor where bank do the bulk of credit intermediation and focus on traditional lending. Effectively, he is calling for the re-imposition of Glass Steagall, the Depression-era legislation that separated commercial banking from investment banking. As we discuss below, this is a radical idea and is at odds with the program Geithner announced earlier this week:

The United States should emerge from the economic crisis with a two-part financial system that places tighter restrictions on banks, says former Federal Reserve chairman Paul Volcker.

To prevent another banking crisis from undermining the economy, the U.S. financial system must turn back the clock to a time when commercial banks were the core of the credit system, said Mr. Volcker…

The system that Mr. Volcker envisions “looks more like the Canadian system than it does like the American system,” he told a Toronto audience last night….

Yves here. An international survey recently put Canada’s banking system as the best in the world. It has five large banks and was never deregulated in a serious way. Back to the article:

Mr. Volcker, an imposing 6-foot 8-inch figure who chaired the Federal Reserve for most of the 1980s under former presidents Jimmy Carter and Ronald Reagan, said the primary characteristic of the new model must be strong commercial banks whose main purpose is to serve consumers and businesses, and provide credit

They would be protected by the government, because their failure would pose a distinct threat to the economy. As a result, they would require closer supervision and regulation than has recently existed in the United States. “Those institutions should not engage in highly risky entrepreneurial activities,” Mr. Volcker said.

In that central part of the system, $25-million or $50-million paydays would not be warranted, he added.

The second part of the financial system would involve the capital markets and include hedge funds, private equity funds, traders and other players who provide fluid markets. Those players would not be dealing directly with customers, and would not need to be highly regulated unless they became extremely large, Mr. Volcker said.

Mr. Volcker’s vision would mark the end of the so-called supermarket banking model, in which a single financial institution dabbles in a range of services from consumer accounts to investment banking.

Mr. Volcker blamed the current crisis largely on compensation practices that “had gotten totally out of hand,” and on “obscure financial engineering.”

“The system is broken,” he said. Fixing it will take “a lot of money and a lot of losses in the banking system.”

The Economic Recovery Advisory Board, modelled on Dwight D. Eisenhower’s Foreign Intelligence Advisory Board, will provide an independent opinion on financial issues as Mr. Obama drafts his plans for recovery.

While this prescription may sound commonsensical to most Americans, for the very big players, it runs counter to their strategic direction of the last 20 years. First, just as the House of Morgan was split into JP Morgan and Morgan Stanley in the Depression. so too would many firms have to be broken apart. Indeed, Volcker’s prescription could conceivably require brokers of various sorts (capital markets intermediaries and retail brokers) to be separate from asset managers. (Over the years where I have upon occasion worked with firms that have money management operations and brokerage, they are inevitably keen to treat their customers as stuffees).

Now why is this radical? Aside from the way it would require the dismantling of some empires built up over the years, it woudl also call for a big change in how banking is done in the US. Most consumers are not aware of the degree to which the “originate and distribute” model has taken hold. Most loans are not held by the bank that provided the loan to the customer. Just as mortgages are bundled and sold, so to are credit card receivables, auto loans, student loans, home equity loans, commercial real estate loans.

To give an idea of the scale of securitized activity, let us turn to Timothy Geithner in early 2007:

Credit market innovations have transformed the financial system from one in which most credit risk is in the form of loans, held to maturity on the balance sheets of banks, to a system in which most credit risk now takes an incredibly diverse array of different forms, much of it held by nonbank financial institutions that mark to market and can take on substantial leverage.

U.S. financial institutions now hold only around 15 percent of total credit outstanding by the nonfarm nonfinancial sector: that is less than half the level of two decades ago. For the largest U.S. banks, credit exposures in over-the-counter derivatives is approaching the level of more traditional forms of credit exposure.

We now know how that movie turned out.

Yet Geithner was a backer of financial innovation and securitization back then, and appears unwavering in his faith. From his speech earlier this week:

Second, alongside this new Financial Stability Trust, together with the Fed, the FDIC, and the private sector, we will establish a Public-Private Investment Fund. This program will provide government capital and government financing to help leverage private capital to help get private markets working again. This fund will be targeted to the legacy loans and assets that are now burdening many financial institutions.

By providing the financing the private markets cannot now provide, this will help start a market for the real estate related assets that are at the center of this crisis. Our objective is to use private capital and private asset managers to help provide a market mechanism for valuing the assets..

Third, working jointly with the Federal Reserve, we are prepared to commit up to a trillion dollars to support a Consumer and Business Lending Initiative. This initiative will kickstart the secondary lending markets, to bring down borrowing costs, and to help get credit flowing again.

In our financial system, 40 percent of consumer lending has historically been available because people buy loans, put them together and sell them. Because this vital source of lending has frozen up, no financial recovery plan will be successful unless it helps restart securitization markets for sound loans made to consumers and businesses – large and small.

Notice the repeated emphasis on getting stuck markets for various securitized assets moving again via government support? The problem is that even if what Geithner does works to a degree, it will come far short of restoring status quo ante, which appears to be his goal. Too many people who should not have gotten credit (or at least as much as they did) will not fare as well under a new regime (it would be terrible policy if they did). But they got this credit because the whole process had too many bad incentives, the biggest that too many people collected fees for sourcing or on-selling loans and didn’t suffer if the loans went pear-shaped. And the other thing that made this system work was the heavy use of credit guarantees, which were in retrospect discovered to have been underpriced.

Notice no mention in the speech of regulatory reform (except at a level so abstract that I don’t expect much) or how to fix the securitization process. Nope, we’re going to throw a trillion dollars at it instead.

Volcker’s idea, though appealing, is thus clearly at odds with the program the rest of Team Obama is on. And let us not kid ourselves about the difficulties in putting it in motion (and I don’t just mean political). John Dizard of the Financial Times pointed out one last June:

You can expect more contradictory public policies…

The process will be harder on the banks and dealers, and therefore on those who depend on them, thanks to the central banks’ hesitancy in forcing recapitalisations last year and earlier this year…

Instead, the central banks were, it seems, hoping that the relief rally in financial stocks that followed the Bear Stearns takeover would go on long enough, and be strong enough, for sufficient capital to be raised on favourable terms. We are now seeing that relief rally peter out.

There was also a fantasy on the part of some regulators that it was possible to return in short order to a world where credit was priced and extended by committees within banks.

This on-balance-sheet world, though, presupposed that the people, or, as they call them now, “skill sets” existed within banks. I remember the floors of company credit analysts at Chase and Citi in the 1970s and early 1980s. They aren’t there now.

So until the misfiring, jerry-built structure of securitised, market-priced, semi-automated credit is repaired by people who know what they are doing, there is no choice but to effectively guarantee the big institutions’ debt.

The second not trivial issue is a world of on-balance sheet banking is securitization is cheaper due the cost of holding bank equity and FDIC insurance (trust me, McKinsey had umpteen variants of charts showing the cost advantage of securitization to commercial banks so they could understand that investment banks were going to continue to eat their lunch). That will mean lower lending than in a securitized world, which most would see as an entirely good thing. It also means a world with banks needing to raise considerably more equity. Not only do they need to rebuild their wrecked balance sheets, but (in aggregate) banks will need to have a good deal more equity because collectively, far more loans will be held by banks.

Even if Volcker eventually prevails, recasting the world of finance could easily take a decade.

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  1. Anonymous

    Very good. You’re providing more detailed analysis. My suggestion is that you write a book on this(Ala Woody and Bernstein.)

    I would like to know:

    Who the hell REALLY chooses the treasury secretary and comparable figures? Obviously Obama knows nothing about these matters. Is there a cabal of international bankers making these choices? Obviously the fall-out from the selection is of historic dimensions.

    Do the American people have any choice in this matter?

    Would the same people be making these decisions in a Mccain administration?

  2. doc holiday

    The inability of Obama to build confidence is a direct result of actions like this, where he shows that America does not come first. It doesn’t get much clearer than this, i.e, Volker is a living legend and Summers is a crook like Paulson.

    History will clearly remember Obama for his simplistic campaign promise of change, set against the reality of stubborn arrogance and the very same fatal flaw of ego that haunted Bush throughout his unpopular terms of office. These fools make nice bookends and obviously are cut from the same cloth, but whocouldaknowd?

  3. Anonymous

    I would rather spend a decade rebuilding a responsible financial system than continue to give tax dollars to the rich. How hard of a decision can that be for folks? Now if we only had a media that could convey such simplistic concepts rather than the propganda they spew currently.

    word verification is flate as in inflate as in the presses are running and 18 months from last September there will be this tendency……

  4. Anonymous

    Well, that was a long winded piece just to tell us a reset is in order and we’ll do the same thing all over again while our children and children’s children pay for it all.

    As long as they get away with redistributing the wealth there is no reason to use Volcker. By the time the meltdown hits the boiling point not even Volcker’s help (if he lives long enough) will end a depression.

    Drudge Report headlines have been poignant lately. Unusual for any MSM.

  5. Yves Smith

    Anon of 1:04 AM,

    I am told Volcker was offered the Treasury Secretary position, but turned it down. Remember, he is 81. But not taking a role that gave him frequent face time with Obama and the cabinet makes it easy for Geithner and Summers to run the show.

  6. Anonymous

    One thing I have not heard in any of the debates on “what to do” with banking is the mention of any possible negative effects from allowing interstate banking. While there are advantages to the consumer, it probably has as big an impact on the size and power of current banks as the repeal of Glass Steagall.

    “The United States should emerge from the economic crisis with a two-part financial system that places tighter restrictions on banks, says former Federal Reserve chairman Paul Volcker.”

    If tighter restrictions are needed on banks, then why wouldn’t a fifty part bank be desirable? Repeal of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 could reintroduce a degree of decentralization and competition to the industry, make the banks more responsive to local economics and serve to isolate problem areas to specific regions, i.e California real estate blows up California banks but does not necessarily affect other states.

  7. Uncle Billy, Mental Widget

    Hi Doc!

    Look at how sick and corrupt and convoluted this whole thing is. Imagine what it’s like when you start to look at the global interconnects. Does the international community have a Volcker that they haven’t marginalized? Is it Buffet? He seems like the master of distributed risk. If so, whose best interests does he have in mind? You’ll never be able to convince me he didn’t see exactly what was going on. Yet he didn’t say a bloody word until it was upon us. Oracle of Omaha. For a funny and possibly telling juxtaposition consider that the same pr company that is representing “octomom” also represents Buffet’s Union Pacific.

  8. Anonymous

    I get so tired of doing everyone’s homework but my contribution: search for this writeup……

    The Mother Of All Crises: Gold Moves Back Into The Monetary System
    Saturday, November 15th, 2008

    Gold is on its way back into the monetary system. That is certain.
    It is also certain that one method being examined at the highest level is the Federal Reserve Gold Certificate Ratio, Modernized and Revitalized and no longer directly connected to interest rates.
    If you are one of the gold gang that fears Volcker as […]

  9. vlade

    @anon 2:30am
    Simply restrict the size of assets under management (including any and all subsidaries and controllable companies), and let it grow only with inflation. If you grow too large, split into two independant companies (or sell assets).

    The unlimited amounts of assets under management is bad both from systemic perspective, and also bad from performance perspective. When you have so many assets that they are hard to place, you get strange results comming from the restricted liquidity (as in you can show great paper results but when you’d try to liquidate your portfolio, you find that the liquidity goes against you). Also, saying “bigger is more efficient” is, in my experience, bollocks.

    The size of these institutions serves only those who are 2/20 renumerated.

  10. Jonathan

    Uncle Billy, how can you claim that Buffett “didn’t say a word”? He was warning about derivatives and CDS years ago, and walked the walk by unwinding the derivative book at Gen Re once they were acquired. He’s protected his shareholders and gave plenty of warning to anyone who paid attention. Like all the other Cassandras, he was reviled and/or ignored by those profiting from the mess, and those who really believed we weren’t in a bubble.

  11. Richard Kline

    Paulson -> Summers-Geithner is looking increasingly comparable to Turgot -> Necker. We know how _that_ one turned out. C'mon, Bo Prez, listen to yer Dutch Uncle. He's got a longer view of things (and not just because he's taller).

  12. Avl Guy

    Coming from Illinois and having inter-acted with the future-President 10 years ago when he was just an accessible and eager state senator, I can say I am not surprised so much by his actions but rather by the thought processes of his legions of supporters…which, remarkably, was also my growing observation in Chicago in the years before he ran for US Senator.

    People resist seeing the real Obama which he didn’t hide much. If you use his books as a guide, you'll see that restructuring or introducing a global banking, finance, and economic system, was never on his radar, in his heart, or on his mind. As recently as late July, his advisors had not even planned to make the summer's headline crisis in banking and finance part of the August democratic convention message; they were content to only reference foreclosures and gas prices.

    Resembling a general prepped to fight the last war, Obama launched his presidential campaign in 2006 to deal with the known pressing issues of that era; Iraq War, Tax Policy, NAFTA, and Social Justice. Those issues defined his intellectual comfort zone and allowed his native brilliance to show. This firm ‘range of passion’ is consistent with his few legislative acts as well as his books & speeches.

    I voted for him in November knowing I was getting the best Prez for 2006’s issues, not someone supremely groomed for the most pressing issue of 2009-12 and the greatest economic crisis since 1933.

    For 2009, it’s almost ordained that Obama will be more dependent on his Treasury Sec'y and Fed Chairman than Bush was on his. I can see Obama not introducing a single concept, goal, or angle of his own creation into his policy discussions with his economic team; these issues are simply too far outside the ‘comfort zone for brilliance’ of this talented 48 yr.old. Also fueling this excessive dependency on his team’s orthodoxy is his professional tendency to split-the-difference and seek the middle of two competing views where both views are always comfortably contained within the orthodox “low-risk” box or within the day’s status quo thinking.

  13. Stephen

    Canadian Banks do have investment banking arms. At times they have gotten themselves into some trouble, CIBC being the most infamous.

    However, the position of these institutions within the country get them watched a lot closer. There is also a cultural element. The senior bankers may come from the “cowboy” side, but history has shown that they if they dont appreciate and properly run things then they risk the golden goose of the bank, the retail and commercial bank.

    The question is, how much direct exposure will Obama get to thi son his visit. The canadians made big noises about all of this at the G20…our unfortuante national characteristics are passive aggresisveness and excessive smugness….the Governor of the Bank of Canada, danger danger an ex Goldman guy, has been promoting the Canadian model.

    The PM has been promoting it as well. I think Obama might get some direct education on how it all works. Intersting side point, the Governor of BoC was talking about systemic stress tests from the IMF back in December. He has alos promoted putting institutions through stress tests. So I suspect some of the ideas are leaking south, uncredited of course.

    Read Mark Carney speeches, BoC Governor, fom Novemeber through January and you will see much of the models that the Canadians have been promoting in our pasisve agressive manner.

  14. Born Again Democrat

    I’m just an amateur, but if Volker (and Roubini) are right it doesn’t matter much that they are being ignored for the moment. Their prescriptions are bound to prevail for lack of alternatives.

    Obama needs to get out front on this. Right now it looks like a lot of looting is going on, including some of his friends and closest advisors. Ouch!

  15. Don

    I’m pushing this:

    “With the government ready to absorb losses, banks are talking outrageous risks knowing that Uncle Sam will cover them if things go south. Raising the trivially low capital requirements of banks, as Paul Volker’s Group of Thirty Commission just proposed, won’t change this behaviour.

    What will change this behaviour is to not let it happen. Banks should be allowed to initiate only conforming, i.e., government-approved, AAA-rated mortgages and business loans. These would be long-term, fixed-rate loans with 20 per cent-down and payments below 25 per cent of income.

    The government, via the Federal Financial Authority, would use tax records to verify loan payment-to-income ratios. It would also spot check collateral. Once approved, the banks would bundle and sell “their” loans within mutual funds.

    Again, traditional bank runs wouldn’t arise. And today’s bank runs, which entail lenders and equity investors avoiding risky banks, wouldn’t either. Why? Because banks would bear zero risk. Mutual fund owners would bear risk, but not the banks. And these lenders would know they were buying government-approved AAA-rated loans, not Bear Stearns‘ CDOs.

    This limited purpose banking is a modern version of narrow banking proposed by Frank Knight, Henry Simons, and Irving Fisher. Banks would hold deposits, cash checks, wire money, originate loans, and market mutual funds, including money market funds with no guarantee of par value redemption.

    With limited purpose banking, financial crises would largely disappear. Banks would never fail, never stop originating loans, never expose the public to massive liabilities, and never see their stock values evaporate. Banks would be stable, boring economic cogs – like gas stations.

    The Fed would also gain full control of the money supply. To expand the money supply, the Fed would continue buying treasuries from the public and supplying cash. But banks wouldn’t be multiplying and contracting M1 (cash plus demand deposits) based on their ever changing decisions about lending deposited funds.

    Milton Friedman, who also advocated narrow banking, blamed the Depression on the Fed’s failure to offset the M1 money multiplier’s collapse. In the past year the M1 multiplier has contracted by over 40 per cent, forcing the Fed to double base money. If the multiplier shoots back up, we could see the money supply and prices explode.

    What about investment banks, brokerage firms, hedge funds, and insurance companies? What’s their right financial order?

    Again, regulate to purpose. Investment banks take companies public and assist in mergers and acquisitions. They shouldn’t be permitted to invest in their clients’ companies. Brokerage firms are here to help us buy and sell assets, not to gamble on spreads. Hedge funds are here to help limit risk exposure. They aren’t here to insure these risks themselves. Finally, insurance companies are here to diversify risk, not write insurance against aggregate shocks.

    The FFA and “less is more” limited purpose banking won’t prevent asset markets from occasionally going nuts. But the functioning of financial markets will no longer be in question. Nor will con artists, parading as “financial engineers,” ever again be free to wreak havoc on the nation’s finances and its citizenry.

    Christophe Chamley is a member of Boston University and the Paris School of Economics. Laurence J. Kotlikoff is professor of economics at Boston University”

    It would allow this, but without having to have the government control banks:

    “Taleb, like me, wants to get rid of risk-taking by banks, and leave non-insured institutions free to take whatever risks they want, as long as they are not creating risks for others. His solution is to nationalize banks.”

    Don the libertarian Democrat

  16. Anonymous

    Volcker is obviously correct. Geithner must either be (i) an idiot, (ii) subject to regulatory capture and cognitive dissonance or (iii) promoting a Trojan horse plan. I peg the odds of (iii) at a little less than 1%, but there is some faint hope that Timmy knows things will get so bad that we will eventually get the political will to go back to Glass Steagal and he’s just towing the party line (i.e., the bankster’s line) until we reach that point.

    Of course, cognitive dissonance is rampant in humanity, but it does strike me as odd that someone as accomplished as Geithner continues to talk about a ‘kickstart’ to credit creation. Consumers and businesses cannot service the debt they have now. Consumers who are unemployed cannot service credit card debt. Office buildings, retail buildings, apartments and hotels do not have the cash flow to service the mortgage debt they have. I’m involved with a portfolio of six hotels in LA that were killing it five months ago and now can’t make payroll or debt service payments. Ummm, could the problem be more obvious? How could a ‘kickstart’ to credit help this situation?

  17. brooklyn91941

    Paul Volker is a true American Treasure. It’s too bad that he’s 81 years old. This fight will take years to unfold.

    The power hungry and greedy bankers will not give up without a fight. We need anew model, because the current one doesn’t work.

    I believe that we are on the cusp of a paradigm shift in America which will restore some sense of sanity to the country.

    Just as the Reagan revolution took years ( and it coincided with the third turning)it will take years to unwind.

    I am hopeful that Obama has picked a good team and that Volker will have input. If not God help us.

  18. Anonymous

    I have read some thoughtful analyses – that square with my experience and knowledge – that the banking industry will simply not allow too much to happen too soon.

    Obama nor any President, can be expected to propose and enact all of the right moves right away. There is tremendous opposition.

    This is a fluid situation. Could change in weeks.

    Note that Geithner’s “plan” is owned by him. This is a set of signals Obama sent.

    The stress tests may be viewed as a back door toward a second stage, where nationalization happens.

    -Frank C.

  19. doc holiday


    Re: Buffett walked the walk by unwinding the derivative book at Gen Re once they were acquired. He's protected his shareholders and gave plenty of warning.

    You may have noticed that his shareholders are a little on edge these days and not feeling as protected and loved. Can you explain the $33 Billion in goodwill and thus his Level 3 assets which he is in denial about? He talked about the threat of derivatives out of one side of his face like he was some honest down to Earth saint, and then he hid a massive sum of goodwill accounting which is linked to his unobservable assets. Go look at Fitch:

    The company's ratio of debt-to-capital excluding its $33 billion goodwill asset was moderately higher at 28%. However, Fitch believes that BRK's excellent acquisition track record largely offsets concerns about tangible capital quality. Fitch also notes that BRK had $39 billion of cash and equivalents at Sept. 30, 2007 and that the company's cash and equivalents averaged $36 billion between year-end 2002 and year-end 2006.

    >> He's a creep and his reputation is based on luck and it's time to wake up and see it for what it is! The dude doesn't pay dividends to shareholders and lives in a bubble and he obviously reminds me of Madoff — and as this stupidity continues to unfold, do not be shocked if Buffett is the next Madoff ponzi scam!

  20. charlie

    I have to second what AvlGuy is saying. Obama is supremely under-equipped when it comes to financial reform matters — it is an issue that doesn’t engage him at all. This is not a criticism — just an observation that when a President doesn’t have an interest he lets his minions run the show (i.e. Bush and terrorism).

    The pain we’ve seen so far is mostly consumers saving money and not shopping. Bad, but the numbers are worse than the bite. I don’t see food riots,but I see a lot of people looking at the price of milk and eggs before buying.

    At what point does the pain become worse, and the President is forced to act? What are those trigger points? Or can we continue for 2-3 years at this heading. I don’t see the Republicans mounting an effective attack in 2 years for the midterns; they are too regional and Michael Steele is a world-class fool.

  21. Uncle Billy, Mental Widget

    Telling Buffet Quotes:

    “Chains of habit are too light to be felt until they are too heavy to be broken”

    “I am quite serious when I say that I do not believe there are, on the whole earth besides, so many intensified bores as in these United States. No man can form an adequate idea of the real meaning of the word, without coming here”
    (A little disdain for Americans there? Wouldn’t you say?)

    “It’s better to hang out with people better than you”
    (Guess that’s not Americans, is it)

    “Profit from the folly rather than participate in it.”

    “Only when the tide goes out do you discover who’s been swimming naked.”

    “Risk comes from not knowing what you’re doing.”

    “Risk is a part of God’s game, alike for men and nations.”
    (Hmm… a little God complex here? He certainly knows that risk is *his* game).

    “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching the leaks.”

    (Does he think of the United States as that leaky boat?)

    “We enjoy the process more than the proceeds” (Who is we?)

    The money shot: “We simply attempt to be fearful when others are greedy and to be greedy when others are fearful” (If he was really smart, he would be involved in creating that fear and greed, wouldn’t he. Refer to “risk comes from not knowing what you’re doing”)

  22. artichoke

    The quote about “intensified bores” was not from Buffett. The style should have given it away, nobody talks that way now.

    It is from Charles Dickens, another man who was successful in judging human character.

    I would surely not put it beyond Buffett to try to influence the “risk” in the economy, and I’m sure his tracks are well covered.

  23. artichoke

    Further to the comment just above about influencing risk, his partner Charles Munger recently wrote an article, the real point of which was to discourage the “buy American” provisions in the bailout. Those Nebraska boys are internationalists for sure!

  24. John

    So, basicially to summerize:

    It’s all going according to plan. The oligarchy wins, the peasants get screwed. Gee, that’s a surprise.

  25. Uncle Billy, Mental Widget

    Munger? Oh yes we should definitely judge a person’s private beliefs and behavior by what they say and print in their own newspapers. (Yeah yeah 21%, whatever).

    Dickens wrote the “bores” quote. Do you mean to say that Buffet didn’t repeat it?

  26. artichoke

    Well I don’t know if he repeated it or not. But attributes it to Buffett which, given the style, I doubt is correct.

    If he quoted it he would have attributed it.

    I don’t know or care what Munger’s private beliefs are, just what he acts on publicly and in business.

  27. doc holiday

    Uncle Billy,

    Nice tah see yah, Happy Valentines Day; hope all is well. I missed you by about three minutes last night, but since your just virtual, it’s ok, I guess.

  28. Koshem Bos

    Obama doesn’t 2 million economist. He has a strong team with Summers who may one day be a Nobel laureate.

    Volcker caused the worst recession in the last 30 years, except the current one. We are better off without him.

  29. Printfaster

    I for one do not worship at the temple of Volcker. In my view, his tenure while saving the dollar failed to address fundametal currency imbalances.

    The fundamental imbalance was that government debt was eating out the monetary base. The fed to protect the dollar went to the private credit markets to soak up government debt.

    This form of disintermediation led to the deindustrialization of the USA and its later trade imbalances.

    There needed to be enough currency on hand to pay the government debt or industry and commerce would be squeezed out.

    So as for Volcker being hero. Feh.

  30. cap vandal

    Great post and it gets at a fundamental issue — namely the issues with having two financial systems. Per Volker and going back to the Depression, a highly regulated system and a less regulated system of brokers and other financial intermediaries.

    Right now, there is a huge effort to do a last minute end run around what was the residue of Glass-Stegall. That is, with the encouragement of the highest levels of government, Merrill was moved into BAC, JPM grabbed the huge deposit base of cleansed WaMu, Goldman and MS became “banks.” All for the benefit of being able to tap into bailout money.

    This is a done deal, right now. Unfortunately.

    A dual system doesn’t work if you allow the less regulated entities to tap into the regulated areas.

    Regulated banks began to be disintermediated in the early 70’s with the advent of money market funds.

    I like the Volker idea, but that system would be a relatively small part of the financial system. Unless a credible idea of how to keep the unregulated parts of the system from squashing the less “capital efficient” regulated banking system — then its like saying we want to go back to the 50’s.

    The current approach of temporarily putting the capital markets people in regulated banks is dubious at best. I don’t think they can be effectively regulated within banks, and that is really the current problem.

    If they are left out, but allowed to tap in via prime brokerage and so called money center banks, then you have Citi again and again.

    For example, when the money market funds were failing and needed a backstop, why weren’t they forced into regulated banks? A two day holiday and cramming them back into banks would have “reintermediated” the banks in one of their core functions. Namely providing short term financing to major corporations.

    The only thing I can think of is to insist that the unregulated entities remain small enough to fail individually. In addition, subsidize the highly regulated entities by demanding that firms relying on the unregulated system keep appropriately priced back up lines of credit with regulated entities.

    No great idea here, but simply turning back the clock doesn’t work. Perhaps we need our own, branded, semi regulated capital markets firms. They could be required to conform to certain minimal standards, including staying on shore and paying taxes. Or else lose all access to other regulated areas of the US economy, like pension funds.

    Where ever regulated and unregulated systems touch, there are opportunities for innovative practices that shift the cost of risk to the regulated entities and indirectly to the public. The only thing we have going for us is that the identical abuses aren’t likely to happen for another generation. People are dumb, but memories tend to last a generation.

  31. cap vandal

    People shouldn’t forget that in the 1950’s, we had large corporate managements run amok, a huge agency problem, and no accountability. Without a credible check on management from capital markets, they are free to behave badly.

    There was never a golden age.

  32. Jonathan

    Doc Holiday,

    You may have noticed that his shareholders are a little on edge these days and not feeling as protected and loved.

    Hm. Speaking as a shareholder for the last decade, I feel just fine. I have no idea what you’re talking about WRT Level 3 and “Fitch”, whomever that might be. Totally off the radar for myself and every other Berkshire stockholder I’ve talked to.

    He’s a creep and his reputation is based on luck and it’s time to wake up and see it for what it is!

    Um, no. Buffett’s record is profoundly unlikely to have occurred due to “luck”, given the extreme length and consistency of outcomes.

    The dude doesn’t pay dividends to shareholders

    For reasons that are clearly stated in material that every Berkshire shareholder should know. I’d much rather Buffett be making deals like those of the last few months than giving me a proportionate amount of cash as dividends which I will, if I’m lucky, get 3% on.

    In any event, Berkshire clearly is not somewhere that you should be placing your money, since you have such passionate feelings about it. I wish you well finding other investment options that make you happier and help you let go of your problems with Buffett.

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