More Evidence of Volcker Being Marginalized

We have what is arguably the best Fed chairman ever ready to roll up his sleeves during the worst financial crisis since the 1930s.

Team Obama has asked him to work on…..the tax code. From Reuters:

A panel led by former Federal Reserve Chairman Paul Volcker will study options for U.S. tax reform and report back to President Barack Obama by December 4, the White House budget director said on Wednesday.

Peter Orszag, director of the White House’s Office of Management and Budget, said the panel would study tax simplification, tackling tax evasion, and reducing “corporate welfare.”

He said the board would look at streamlining U.S. tax credits and being more aggressive at bringing in some $300 billion in annual uncollected tax revenues….

Volcker was chairman of the Federal Reserve during the Carter and Reagan administrations. He is now chairman of President Barack Obama’s new Economic Recovery Advisory Board.

Orszag said the board would select a task force to study tax reform. He said Obama would like to see board members Laura Tyson, Martin Feldstein, Roger Ferguson and William Donaldson as part of that team.

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  1. Peripheral Visionary

    The tax code is very important, but unfortunately, I have to agree with the premise: he is being sidelined. I suspect that his concerns about the current direction have resulted in his being shuffled to the back of the administration.

    I suspect he has too much class to make a lot of noise, and will help where he has been asked to help; but it’s a terrible shame that one of the country’s best talents is being underutilized.

  2. Anonymous

    U.S. stocks retreated after a Treasury auction of five-year notes drew a higher-than-forecast yield, spurring concern government attempts to lower interest rates will fail amid record sales of bonds.

    Don't know how long before this little money printing banana republic implodes under the weight of it's own debt but it's coming down the track like a freight train.

  3. Mannwich

    I’m surprised he hasn’t quit by now. He must have better things to do with this waning days on the earth. I do suspect that he could be on deck if/when Geithner, Bernanke and Summers fail and are asked to resign.

  4. burnside

    Volcker is notably still present and will be available as events track the courses he has already described. Don’t underestimate the man.

    He works with what he has.

  5. Jon H

    Donaldson? Hasn’t he already done enough damage by letting the investment banks leverage themselves to oblivion?

  6. ndk

    I’m surprised he hasn’t quit by now. He must have better things to do with this waning days on the earth.

    I think Volcker has a very strong sense of civic duty, and will probably go where he feels he can best serve his country. I’m sure he’s also keenly aware of his visibility and reluctant to do anything that could be seen as harming recovery or the President’s policies.

    While he’s too good a man to function effectively in an administration dominated by personalities like Emanuel and Summers, I don’t see him leaving or rocking the boat any time soon. Even if he did have a greater voice in the administration, Congress is still more beholden to the financial sector than the populace at this point.

    Perhaps the abject failure of quantitative easing and PPIF will give him a greater voice, since he’s unable to give it to himself.

  7. Anonymous

    This is fine. After G-boy flames out (soon in the coming). Volcker will be left to pick up the pieces. Exactly what is needed. (liquidate the banks, liquidate the farms, liquidate the bondholders)

  8. Leo Kolivakis

    No surprise to me. Volcker was calling for a massive regulatory overhaul which includes the shadow banking system – hedge funds, private equity and real estate funds. He also thought insurance companies needed more regulation too.

    Finally, Volcker knows you need a global regulatory approach to deal with systemic risk.

    Bottom line: He scared the pants off of the Masters of the Universe and they asked the Obama team to brush him aside.

    What did Bush Sr. once say, “read my lips, what we say goes!”?

    The Obama administration is no different than that of George W’s administration, except they are sleazier and sneakier, thus far more dangerous.

    It’s too bad because I actually thought they were going to bring the world “change we can believe in”.

    I am still waiting for that change.



  9. Anonymous

    Ever since I took my son on his first major roller coaster ride (Calif Screamin'), I prefer to use this term to describe our current economic situation.

    The essence of the metaphor is not in describing the swinging gyrations (even though those are equally valid), but rather the fact that once you're strapped in, there's no getting off until the ride is finished.

    The is especially appropriate as you slowly ratchet up the highest point in the ride just before the big plunge. (This is the part where my son was gripping my arm.) You know what's coming ahead, but the sense of time it takes to arrive at the top during the climb seems to move very slowly.

    The best part is, that no matter how badly you may want to get off the ride at that point, you're strapped in and there is simply no getting off no matter how frantic & desperate you may become. (He didn't freak out – he just closed his eyes.)

    It's only after the ride is over and the restraint comes off that you get to step off onto terra firma. (Of course, in his case, he was so stoked to survive that we had to ride it a few more times before we left. Don't think that's gonna happen in real life.)

    Our economic ride will not be over until two things occur:
    1. The debt overhang is defaulted & cleared. (All of it, which means corporate bond holders [pensions, SWF, etc] get shaved); and
    2. A sustainable economic system based on savings, investment & production replaces the failed asset inflation/credit expansion consumption driven FIRE model.

    Everything else is just whiling away the time while we slowly but surely climb the big ride in the sky.

  10. Eyal Bar

    The best thing Volcker can do is make predictions like “This will not work, it will lead to A B C and D”. Then, when A B C and D take place, he will be able to get Obama to follow him more easily, and maybe even add an “or else”. Volcker quitting would hurt Obama’s credibility so he does have power.

  11. Anonymous

    Given how the economic catastrophe is the defining issue of this generation, it wouldn’t be a terrible idea to put Volcker in as President and let Obama go back to being a well-packaged, ineffective legislator with very questionable judgement and far too much ego.

    Other members of government, like Biden, Clinton, etc. could handle the ‘lesser’ stuff like foreign policy (Obama is proving to be a bust there, too, so what the heck).

    It could never happen, of course. But putting in an experienced, highly competent economic expert at this time would be the best we could hope for. Instead, we get Obama, Summers, Geithner, the Three Stooges of handling an economic crises.

    What’s that old saw about people getting the leaders they deserve? Guess we haven’t deserved much for quite a while now….

  12. Economic Darwinism

    Well, they couldn’t ask Geithner, a.k.a. “Mr TurboTax” to reform the tax code, could they?

    Not only is this administration marginalizing Volcker, they are also marginalizing Krugman and Roubini.

    You have the dream team: Volcker, Krugman, and Roubini there WANTING to help, yet we continue down this road to ruin.

    The problems are bigger than banks. They are bigger than most countries. Blowing trillions of dollars on banks is going to diminish the ability to allocate precious capital where it is more desperately needed later.

  13. Anonymous

    One thing I’ve noticed is that it’s called the “Geithner Plan”, I suspect that’s for a reason and it means that if it fails, only Geithner will go, leaving Summers in place. What’s more, Neal Wolin, nominated to be Dep. Sec. under Geithner is Summers’ boy.

    So I wouldn’t bet Volcker is on deck. My money is that Summers is on deck. Obama wanted Summers originally and the only reason he didn’t get the job was because of confirmation problems (you know how spiteful us women are). They seem to be protecting Summers (and Obama) by calling this entire thing the “Geithner Plan.” When I doubt it’s really only Geithner’s plan. It’s just he’s the pre-designated fall guy if it doesn’t work.

  14. Anonymous

    Folks, Paul Volcker is not a baby.

    If he wanted to send a signal of some kind, he’d leave, or leak. I think it’s safe to say he’s on board.

    I think Obama knows who he is and what his standing is. You’re imagining things based on preexisting prejudices.

    The constant assumptions about politics and personal motivations are a serious weak link in this blog. Yves, you should get people like DeLong, who’ve been in the game, to post here, not just industry-side people.

  15. Leo Kolivakis

    No, Volcker is not a baby and you are right, he is on board.

    I try to leave politics outside my discussions, and I openly rooted for Obama, believing he had what it took to make some real changes, not superficial ones.

    I really think he needs to expand his economic team and invite Krugman, Stiglitz, De Long and even Lucas (from Chicago)to discuss the incentives of this plan and whether it will bring about a sustainable recovery.

    We need the top economic minds on this financial crisis, not more smoke & mirrors from guys pandering to Wall Street, private equity and hedge funds.

    Obama was right: this is a defining moment in history, but I do not think he has the right economic team steering him on the right path.

    Finally, some of us who have worked on the buy and sell side can offer you a glimpse of what is going on behind the scenes.

    It all comes down to who is benefitting from this plan. And it isn't the hard working taxpayers.



  16. Anonymous


    I respectfully disagree with your assertion that Volker is being marginalized.

    We all are playing a very serious glass bead game here and since Volker is still on the roster he can still be put into the lineup.

    Personally I think that having Volker work with others on the tax code is genius. When the impetus for real change finally gets here we may have raised the understanding level of all Americans about what is at stake, who is gaming the system and how best to structure a better playing field.


  17. Anonymous

    volcker and giethner are both trilateral commission members. volcker wouldn’t be doing anything differently.

    everyone here should understand that none of this is an accident.

  18. tz

    Maybe he can work on changing the marginalized tax rates.

    At least he might still be around when (if?) Geithner gets ejected.

  19. Anonymous

    Tax code reform will be very necessary to pay for the current spending. This may not be the most central issue to tackle, but it is hardly trivial make-work to sideline someone.

    Volker is important, but Geitner has the lead right now. Depending on how things go, Volker may end up with the lead. It would be arrogance for Volker to make waves because he is not the number one guy right now. My guess is that while he may not be happy with the current plan, he probably does not view it as ruinous.

    For all of you that are utterly convinced you know the exact path that should be followed to cushion the crash, here is the truth: NO ONE ABSOLUTELY KNOWS HOW TO BEST MITIGATE THE CURRENT ENVIRONMENT — not Geitner, not Volker, not you. We will be feeling our way out of this, and I think it is unlikely that any one set of actions will suffice.

    Any radical action (e.g., just nationalize the troubled banks, which include most of the big ones) will have massive, rippling unintended consequences. The current path may end up being futile, and it may end up being necessary to take more radical actions, but I think it is worth some expenditure to at least try a softer approach.

    — Crowman

  20. Richard

    You’re all nibbling around the edges. The only issue is: Is Obama wrecking the country by mistake or on purpose?

  21. Anonymous

    Volker is most assuredly not “the Colin Powell of the Obama administration”. Colin Powell believed (correctly) that the Bush administration was lying about the Al Qaeda/Iraq connection and chose to tow the company line anyway. Volker may disagree with Geitner, but that is one opinion against another. No one knows with absolute certainty what the optimal path is.

    If stimulus/TARP/etc. fail to adress the full issue (which seems likely given the sheer numerical size of the issues), nationalization is still an option. Perhaps some of the banks can be saved via the afforementioned initiatives prior to dropping the nationization bomb.

    Nationalization sounds like a nice, quick, clean option, but blowing up the bond holders of such immense institutions is likely to have systemic impacts. If softer approaches limit the amount of nationalization, I think we will be far better off.

    — Crowman

  22. Bill

    “… the panel would study tax simplification, tackling tax evasion, AND REDUCING “CORPORATE WELFARE” (emphasis added)

    Pardon my french, but WTF !!!

  23. Anonymous

    In speaking with people close to him, I can tell you he definitely feels marginalized. But he is committed to doing whatever it takes to help the administration (and the US) get out of this mess.

    That being said, I definitely do not think he is being utilized well, but he will stay on board no matter what they ask of him (though I should note he did have a pacemaker recently put in, so he needs to take it easy).

  24. Anonymous

    With tens of millions of Americans uninsured and a paycheck or two from oblivion, I suspect that Patrick Henry’s “Give me liberty of give me death” is resonating more and more with every bailout and handout to millionaires and scammers and fleecers.

    And having little to lose, I bet many of the electorate would support a radical overhaul of banking and monetary policy. In my life I’ve been amazed at the gut intelligence of folks about political/economic matter, even those who aren’t well-versed on things and can’t quite phrase their rebellion in the technical virtuosity of someone who has mastered the language of wonkish quadruplepseak.

    It’s disappointing Vocker hasn’t had a more front and center role. His acerbic comments in recent years show he has little respect for the bubble/bailout/bonus approach to running the system. I think he senses, at bottom, how immoral and destructive it is to liberty and the best of American idealism.

    He is the only one of the gang that, too my knowledge, fly fishes. Eisenhower did too. IT’s a thoughtful past-time that teaches the rhythms of nature which educate far more than sterile steriod-charged wonkish manipulations. A long walk in the woods would set these guys a little straighter for a time. Just look at the trees and the sky and clear the mind of nonsense and words that lack meaning.

    If they were capable of intellectual honesty, they’d have a very receptive American public who would want nothing more than to be part of a great re-constitution of the moral fiber of our monetary and banking foundation.

    Why Obama, the great deviner of national zeitgeist, doesn’t see this to its logical conclusions is a bit of a mystery to me. It may be that he, like the rebellious Roman gladiators on the road to Rome, sort of stalls in the face of the nation’s Pater-gravitas superego and loses the inspiration in a burst of sweat and careful confusion.

    No, it’s the mother-lode, the great Goddess of Liberty that he needs to elevate. Like the Delacroix painting. Volcker could be the designated driver, while the Penthesus rage at Obama’s Dionysus and come to the same fate as Euripedes penned them too.

    Ha ha. That you for your indulgence.

    The tax code is no doubt interesting to an accountant. And maybe if we’re lucky there’s a Trojan Horse there that Volcker can cram himself in to. We could only be so lucky. But it would be better if he were front and center, unless I am too sentimental and I might be.

    America wants a serious reform. When you have nothing, you have nothing to lose. And if you get dignity as a recompense, then you’re ahead of the game, and your happy that your suffering has meaning. It could be done, now, if they put someone with imagination out in front and have the technocrats of the numerically literate borg follow orders. It would be an intellectual revolution but not a physical one. And capital could still be formed easily for worthy needs. But the idiot savants would not get their 2 and 20 or their VC play money. And the rest of us could save at a 4% or 5% yield.

    They day may yet come. I still think we have more sense than the Japanese or the Europeans. We just need to plow through our genial confusion and “benefit of the doubt” temperment to our leaders, and our trust of them not to lie too brazenly. After a while thought, the jig is up. Maybe 6 months from now, it will be. Hopefully Volcker will remain in good health. I hope he is out on the Stream on April 1, opening day of trout season, breathing and thinking, and not in the office.

  25. Anonymous

    Richard: The country was ruined during Bush’s watch. Obama is trying to pick up the pieces. To suggest otherwise is to deny the obvious — he took office 2 months ago.

    Two years from now you can make assertians of mistakes made by Obama. No one knows how successful Obama will be at cleaning up the train wreck but at least he should be given a chance. This is just the opening salvo.

  26. Tortoise

    OK, let us try to be positive. Reforming the tax code may be a good job for Paul who is outspoken and does not mind being unpopular. It does not take great expertise, just the guts to call a spade a spade. Like, why not abolish all these stupid housing-related deductions (oh the realtor and developer lobbies) or the health and retirement salmagundi of deductions and regulations (oh the insurance and investment lobbies).

    By the way, we now say that Paul Volcker was the best Fed chairman but I can remind you that during his tenure he was also the most unpopular. History may repeat. The average American thinks that all these deductions were for the benefit of his and hers and will scream bloody murder when someone tries to remove them. We all get the tax code we deserve.

  27. Jim T

    As much as I hated Paul Volker during the years 1979 – 1983 for his “DAMN ALL” inflation fighting high interest rates that caused me and many others to lose our businesses and declair bankruptcy. He by far was the best Federal Reserve Chairman we have ever had!

    He was and is the ONLY ONE with the balls to do what has to be done to fix the problem! He would have ripped the heart out of Wall Street at let those bastards go bankrupt and take the losses they deserve. He wouldn’t give a shit about popular sentiment, he would just fix the problem and if some guilty people had to fall so be it. He didn’t care how well connected you were, he knew what he had to do to fix the problem and he did it.

    Don’t you think Jimmy and Ronny wanted to stop him! You bet your ass they did because he caused havick with the political polls. He is one of the reasons Jimmy didn’t see a second term!

    Obama doesn’t have the balls to put Volcker in a real power position and now his weak puke advisors are pushing Volcker out of the way because they are pussies and afraid of good old Paul!

    Yes he helped put me into bankruptcy in 1982, but by 1989 I was a millionair because of him too!

  28. Anonymous

    Volcker is a sad, pathetic man. Proof? He supported Obama, the hard core Marxist. A has been, washed up. Stick a fork in him, he is done.

  29. Anonymous

    Volker is being held on the sidelines in case the current Treasuries’ plans turn into either a disastrous deflation or ruinous inflation.If either one of these happen ,neither Summers or Geithner
    will have any credibity.Volker will come in and be the real domestic President with Obama genuflecting on his knees

  30. Edwardo

    Someone wrote:

    "We need the top economic minds on this financial crisis, not more smoke & mirrors from guys pandering to Wall Street, private equity and hedge funds."

    Top economic minds wouldn't hurt, but what we really need is more of what aligns with the second half of your sentence, independent actors with integrity. We certainly don't have that now. Secretary Geithner is part of of the problem and his approach leads to a hollowed out state.

  31. damocles

    The tax code stuff will go nowhere, and never does when real reform is not politically viable.
    Volcker is going to be rearranging deck chairs on the Titanic.

  32. Koshem Bos

    Volcker’s record as the instigator of one of the worst recessions in history doesn’t succeed in obliterating the legend that he is great; he isn’t. He is very old and this country is large enough to have at least 10 economists much better suited to the job.

  33. Steve R. Barbour

    Yves Smith
    We have what is arguably the best Fed chairman ever ready to roll up his sleeves during the worst financial crisis since the 1930s.

    Team Obama has asked him to work on…..the tax code.


    Major overhauls to the tax code show a time horizon as long as 100 years. Likewise other major ‘core system’ changes of society, such as Emperor Justinian’s judicial reforms, can have such major and long term impacts that they are remarked upon by historians 1500 years later.

    You won’t however, find many government bailouts/seizures in a 1000 year history… because, frankly, they don’t mean shit in the long term.

    To help grasp this, consider that we have hundreds of billions of dollars going to corporate welfare every year. In addition we’ve given away billions and billions of dollars in free ‘bonuses’ to the ‘banking elite’ in the form of favorable tax rates.


    This is every year.

    Every year.

    Even if we assume that this continual looting of society averaged to a mere ‘$100 billion/year’ for the last 30 years, that $3 trillion dollars. Which is, incidentally, more than all the government bailouts thus far combined* — and thats assuming 100% losses from each and everyone of them (a 50% loss rate is probably more realistic).

    *(yes, that doesn’t include the ‘guarentees’)

    Methinks that if Volker really is as good as you say, he’ll do a lot more good rewriting our taxcode than directing our bailouts. Likewise if he were set on rewriting government regulation of the financial industry. Personally, I’d rather leverage genius over a period of hundred years than over a period of one. And lets be frank, Obama’s first treasury secretary was almost certainly doomed to such a short run.

    That doesn’t mean I wouldn’t like to see Larry and Geithner be *cough* ‘replaced’ by someone whose heart seemed to be a little closer to the taxpayers and a little further from wallstreet.

    Nor does it mean I’m not more than a little disappointed that Obama hasn’t done anything about those two yet, and didn’t force them to put together a system with less potential for being gamed.

    But, Obama still has 43 months left to ‘impress me’ (Nov 4, 2012 is the final deadline).

  34. Juan

    2009 is not 1979 but may be worth recalling that, according to Carter’s domestic policy advisor Stuart Eizenstat, Volker was selected to fill the hole at the Fed since: “he was the candidate of Wall Street. This was their price, in effect.”*

    No doubt his policies helped transform a quite excessive rate of inflation into disinflation but at very great cost, to include Latin American and African debt crisis as cost of servicing was driven through the roof and austerity programs put in place.

    Certainly without intent, Volker helped create what came to be known as neo-liberalism and the Washington Consensus.

    Given developments over the intervening decades, I would also guess that he is no longer ‘Wall Street’s choice’ and, therefore, an improvement set aside to tax duties.

    *Rather than “Wall Street” in general, this might be tightened to say ‘bond market’.

  35. ThreeFifty

    I have utmost respect for Mr. Volcker but is he even the right man to fix the tax code?

    Shouldn’t the economist (Summers) fix the tax code while the banker (Volcker) fix the banks? What am I missing here?

  36. Anonymous

    Volcker has to remain on the sidelines. At age 81 he doesn’t have the stamina to take a front and center role on the firefighting frontlines. And seriously, that would be a waste of his talents. Do you really want him to be the one fielding those loopy questions from “Mad Maxine” Waters, with his penchant for bluntness and not suffering fools gladly? He’d probably just end up like that other grumpy old man Fred Thompson and walk away.

    At this point in his life, he has to be a “big picture” guy, not Mr. Detail-Oriented like Geithner.

    Reforming the tax code is an incredibly knotty problem, right up there with reforming health care or Social Security. Maybe only someone of Volcker’s gravitas, reputation and credibility can push through simplifications and possibly tax increases.

    The one sure way to eliminate budget deficits for the post-recession long term would be to introduce a federal consumption tax, a VAT tax or a Goods and Services Tax (GST) like Canada’s. The idea is probably dead on arrival, but if anyone could push through such a proposal it would be Volcker.

  37. Gloppie

    How to reform the Tax Code;

    scrap all of it.

    1/ Flat Tax everything all the time. A sort of velocity tax. Every time money changes hand during any transaction, payment of salary, wages, purchases, inheritance, corporate, business, insurance, banks, finance, and especially clearing, etc, everything a fixed portion is removed.
    The portion has to be the same for everything all the time, and is calculated at regular interval on a global basis.
    2/ let the markets sort it; the rule is simple, predictable and creates transparency on it’s own.

  38. Anon1

    Can anyone even read the tax code in just 8 months?

    Who reads the tax code? I trust TaxCut to handle all that automagically.

  39. Anon1

    Simplifying the tax code (without the regressive flat tax):

    If you BRING HOME between $30,000/yr and $150,000/yr (indexed to inflation) as an individual, you pay 15% with a deduction for your mortgage interest and charitable giving (this means if you bring home ANY income of ANY kind by ANY means).

    If you bring home $150,001 to $250,000 as an individual you pay 33%. ONLY deducting charity.

    If you bring home >$250,000 then you pay 40%. ONLY deducting charity.

    Corporations get taxed based on the differential between their top executive compensation (in ANY form: stock options, bonuses, use of a company mansion, expense account, etc all count) and average worker compensation in ACTUAL US dollars, regardless of where they actually reside. Tax is minimized when top compensation is no higher than 40:1. As compensation goes above 40:1, the corporate tax increases. Using "in ACTUAL US dollars regardless" of worker's actual location prevents gaming the system by outsourcing all your labor to slave labor countries. Paying someone $1/day in slave labor country X means that you cannot pay your top execs more than $40/day to avoid the tax hit.

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