On the Curious Timing and Content of Volcker’s Mislabeled “Blistering” Speech

Today, quite a few commentators fell in with the take of the writeup by Real Time Economics on a speech by Paul Volcker given a conference on macroprudential regulation hosted by the Federal Reserve Bank of Chicago. Its lead-in:

Former Federal Reserve Chairman Paul Volcker scrapped a prepared speech he had planned to deliver at the Federal Reserve Bank of Chicago on Thursday, and instead delivered a blistering, off-the-cuff critique leveled at nearly every corner of the financial system.

Standing at a lectern with his hands in his pockets, Volcker moved unsparingly from banks to regulators to business schools to the Fed to money-market funds during his luncheon speech.

Now admittedly, it’s refreshing to see someone of Volcker’s stature make some candid comments about banks and financial regulation. And taken in isolation, some of his remarks were suitably critical. For instance, he characterized investment banks as

…trading machines instead of investment banks [leading to] encroachment on the territory of commercial banks, and commercial banks encroached on the territory of others in a way that couldn’t easily be managed by the old supervisory system

His most critical remark was:

The financial system is broken. We can use that term in late 2008, and I think it’s fair to still use the term unfortunately. We know that parts of it are absolutely broken, like the mortgage market which only happens to be the most important part of our capital markets [and has] become a subsidiary of the U.S. government

And he took a swipe at fancy finance:

We had all our best business schools in the United States pouring out financial engineers, every smart young mathematician and physicist said ‘I don’t want to be a civil engineer, a mechanical engineer. I’m a smart guy, I want to go to Wall Street.’ And then you know all the risks were going to be sliced and diced and [people thought] the market would be resilient and not face any crises. We took care of all that stuff, and I think that was the general philosophy that markets are efficient and self correcting and we don’t have to worry about them too much.

He also expressed healthy skepticism on whether financial regulatory reform would work. For instance, Volcker contended that leaving too much to regulator judgment put them in too weak a position relative to banks who would resort to political pressure to get their way. He also wondered whether resolution authority would work as advertised.

But did anyone who took up the line that this was tough talk actually watch the speech?

Picture 9

You can view it here.

Unfortunately, the reactions to Volcker’s speech say far more about politics and PR in the US than they do about what he actually said. Volcker’s comments were delivered in a moderate, occasionally perplexed tone. He was often candid and descriptive, far from “blistering.” And despite the Wall Street Journal headline, “Volcker Spares No One in Broad Critique,” in fact he left many targets untouched (bank pay, accounting chicanery, “free market” ideology, cognitive capture of regulators and the revolving door between regulatory positions and lucrative private sector roles, predatory behavior by financial firms). In fact, Volcker was a defender of traditional commercial banks, noting that they have special role via acting as depositaries and payment services, and complaining of how money market funds were encroaching on their turf and providing similar functions without having the same degree of oversight and capital requirements. He also spent a fair bit of his talk extolling the Fed as the logical party to serve as the lead financial regulator, while somehow missing that the central bank did a horrific job in the runup to the crisis and is chock full of monetary economists who have no interest in financial firms’ inner workings.

Indeed, Volcker actually said (and I am not making this up), that the mess in the economy was NOT the result of the financial crisis. His formulation is rather astonishing. He depicts the financial crisis as the result of real economy imbalances, as opposed to the build up of speculative excesses in a grossly undercaptialized, tightly coupled financial system (starts at 9:30).

But in saying that I don’t mean to blame the crisis on the regulators or even on the market. I mean, this crisis got so serious, it’s so difficult to get out of this recession because of disequilibrium in the real economy. You know the story…when the bubble in housing burst, then the financial system came under great pressure, you don’t blame it for originating the crisis, in fact, under pressure, it broke.

Huh? The idea that the real economy distortions produced the crisis. as opposed to deregulation led to excessive leverage in financial firms and were the primary cause of distortions in the real economy, is barmy. Contrast Volcker’s take with that of Meryvn King, Governor of the Bank of England in a 2009 speech:

Two years ago Scotland was home to two of the largest and most respected international banks. Both are now largely state-owned. Sir Walter Scott would have been mortified by these events. Writing in 1826, under the pseudonym of Malachi Malagrowther, he observed that:

“Not only did the Banks dispersed throughout Scotland afford the means of bringing the country to an unexpected and almost marvellous degree of prosperity, but in no considerable instance, save one [the Ayr Bank], have their own over-speculating undertakings been the means of interrupting that prosperity”.

Banking has not been good for the wealth of the Scottish – and, it should be said, almost any other – nation recently. Over the past year, almost six million jobs have been lost in the United States, over 2 ½ million in the euro area, and over half a million in the United Kingdom. Our national debt is rising rapidly, not least as the consequence of support to the banking system. We shall all be paying for the impact of this crisis on the public finances for a generation.

To put none too fine a point on it, King is the top central banker an a country where financial services constitutes a bigger proportion of GDP than the US, yet he does not hesitate to place blame for the crisis where it belongs, on the banks (and he is willing to eat crow for regulatory lapses). Volcker, by contrast, offers a critique which is hardly controversial, yet gives the industry a pass.

The reason Volcker’s speech was greeted with overdone enthusiasm is that Americans are fed such a steady diet of propaganda by the officialdom that anything that bears some resemblance to observable reality is bracing by mere virtue of contrast. Think of Bernanke’s freakish calm (he looks medicated to me, although he apparently isn’t) and well honed ability to give testimony remarkably devoid of content, or Geithner’s bobbing and weaving when under the spotlight. But this circling of the wagons fools no one; indeed, Obama’s weak poll ratings and the success of the Tea Party show that polished story lines have not dispelled well warranted public anger against the banks and their enablers.

Note also the timing of this episode. This sort of talk, no matter how tame compared to what really ought and needs to be said, could have had a real impact while the financial regulatory reform negotiations were on. Volcker is virtually the only public figure with the stature to carry real weight in disputing the sort of palaver trotted out by the banksters in defense of their pet desires. But he was kept on a short leash by the Obama administration, apparently tasked only to defend the so-called Volcker rule, which was meant to get banks out of the proprietary trading business but was watered down to a considerable degree. But that simply confirms what we already know too well: that even Volcker’s modest reform ideas were more than what the bank-friendly Administration was prepared to support.

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  1. psychohistorian

    Barmy you called him with his characterization of the reason for our economic meltdown and its fits. This is another example of where the MSM defines the total playing field of discussion about economic matters some where out in right wing land and considers Volker’s comments as some hippie screed.

    With apologies to Voltaire, Reality, like History is a lie commonly agreed upon.

  2. attempter

    Yup, this is an example of the system setting the limits of acceptable discourse. Volcker’s lies and wimpy objections are to be taken as the most severe criticism within the limits of reason, while any stronger, more comprehensive (i.e. truthful) critique is to be dismissed as extremism, relegated to the “sphere of deviance”. (Volcker’s meant to help set the limit of the sphere of controversy. And since Warren sometimes skirts the line of deviance, bringing her into the system the way they have is meant to shut her up.)

    1. DownSouth

      Yep, welcome to our new banana republic. US politicians have learned their lessons well from their tutors south of the border. All this “controversy” is perfectly scripted and perfectly choreographed. Think of it like professional wrestling, great entertainment but hardly a real contest.

      In Mexico it was discovered that the putative political opposition to the PRI was being funded by the PRI. The PRI is the political party that stayed in power for over 80 years. Heck, even the protesters and union leaders who “protested” against the PRI were on the PRI’s payroll.

      In the US we now have the Tea Party and the Republican party. But do they offer any substantive options for the American voter. I think not.

        1. DownSouth

          Great analysis.

          It is without a doubt true that many Mexicans, perhaps even a majority, feel they will get a fairer shake from Chapo Guzman, the most notorious narco, than from Carlos Slim, the most notorious oligarch, who President Calderon works for.

          I certainly wouldn’t profess to know all the ins and outs of what is going on in Mexico. It is way too complex, and the situation is fluid. But a somewhat different view to that offered by Ross was given in this article that sundog furnished the other day:


          It posits that the drug organizations, the Mexican government and the US government are all on the same team, working hand in glove with each other. Ross, on the other hand, pits the narcos against a coalition comprised of the Mexican government, the US government and the neoliberals, that is the Carlos Slims of the world who control both the US and Mexican governments.

          Either way you cut it, though, the earthly reality is far different from the official versions propagandized by the Mexican and US governments.

          1. Kevin de Bruxelles

            Historically, Organized Crime is reactionary and follows a predictable pattern as it develops. It typically starts as small opportunistic predatory street gangs and if the organization survives this stage it moves up to a permanent parasitical level of basic criminal activity. As it develops further it enters into a symbiotic relationship with the ruling elite where their interests often coincide (as evidenced by growing corruption) this is often masked by a brutal competition as is seen in Mexico today. If the ruling elite get in trouble with the masses they will turn to Organized Crime to form death squads and bust unions for example. This way Organized Crime gets an inside track to one day taking power for itself.

            Sometimes Organized Crime will use chameleon-like tactics to appear to be revolutionary or more simply, down with the common man. The truth is though they are nothing more than parasites aligned with the ruling class. In Italy, Cuba, and Algeria, Organized Crime fought hard for their ruling elites against potential revolutions. Look at the values expressed in most typical Gangsta Rap videos. These people aren’t against the ruling class; they simply want to replace it.

            So I would tend much more towards Giordano’s viewpoint which you posted. Ross, as he kind of gets to at the end, is misusing the word revolution, which is very easy to do. It should really be used to describe a fundamental shift in the power relations within a society. What may happen in Mexico is more of an elite displacement move where one criminal gang boots out another and takes over the top spot for a while. A couple years later another gang will claw its way up a bloody stairway to power and in its turn eject the reigning occupant. The seventy percent living in poverty will only continue to have more company in their ranks until they get a clue and begin to work together against all parasites.

          2. LeeAnne


            Drug money rules. I read that article, and from the prospective of research on the drug wars, its safe to say that after 100 years of US drug prohibition and since the trade cannot exist without paying off customs, politicians, etc., drug money on today’s scale owns and competes with all levers of government, military, banking and corporate power. And that drug money exists in the corners of all of our lives.

            Although reporting and analysis on the illegal drug industry in general is clearly controlled, the idea that assassinated journalists could be suspected as couriers for one side or another is a new one to me.

            I’ll still shed a tear when any journalist anywhere is killed or harmed in any way in the line of duty.

          3. Doug Terpstra

            DownSouth and Attempter,

            Thanks for the CounterPunch article— fascinating parallels to Mexico’s revolution a century earlier, which also began in El Norte and was tainted by purported narco-violence (including kidnappings). This tracks with what others here have also noted— that the “drug war” (Clinton’s panned “Plan Mexico”) is used interchangeably with the “war [of] terror” as cover for ‘golpistas’ and the pangs of revolution — inevitable symptoms of a fatally dysfunctional economy made worse by NAFTA and the recent shuttering of El Norte’s safety-relief valve.

            How sick that our elites would want to emulate a failed state. As what you called “the Mexicanization of the United States” accelerates, a critical difference is that we do not have such a vital safety valve here (nor then do Mexico’s plutocrats!). This could conceivably devolve into a reign of terror here as it is already for many Mexicans, but if the stars align it could ultimately force our passage to radically new healthy economic system when the current order collapses.

            From varied sources, “Anti-Fascist Calling” also documents very strange events tied to this “drug war”—of covert liquidity for bankrupt banksters, of CIA and Blackwater involvement, and assassinations of reformist political candidates.


          4. Sundog

            I’m not much impressed by the focus Ross places on political actors, as opposed to business interests, but it’s news to me that some Mexican groups have been placed on the terrorist list. That’s bound to have implications for US action. There has been insistent chatter from the US right that Hezbollah has become well established in Mexico and is increasingly active.

            Here’s another perspective. Joaquin Villalobos is the former military leader of El Salvador’s FMLN and now works in conflict resolution.


            The following is a great rant concerning US media vs reality. The issues are similar to those raised by Yves above.

            The Times reports, day after day, that the murders are the result of a war that the Mexican Army and the Federal Judicial Police are waging against cocaine, marijuana, methamphetamine, and the country’s drug cartels.

            That’s incorrect.

            That is a fantasy.

            The Mexican Army and the Federal Judicial Police are fighting for their piece of the drug traffic.

            Sometimes they fight the State Judicial Police. Sometimes they fight municipal police. Sometimes they fight the drug cartels. Often they murder innocent witnesses to their other murders.

            None of those powerful institutions – the Army, the Federal Judicial Police, the State Judicial Police, or whatever Mexico’s latest crime-fightin’ guys are called – are fighting against drugs. They are fighting for their piece of it.

            Robert Kahn, “Murder, Inc., Wholesale”

            I suspect that there are parallels between Mexico and the economic Mess regarding the extent to which the American media (and perhaps American society more broadly) is capable of acknowledging reality. Iraq and Afghanistan are two other glaring examples.

          5. EmilianoZ


            thanks for posting Al Giordano’s piece. It’s really an eye-opener. So far I haven’t taken much of an interest in the drug war in Mexico, but this article makes so much sense that I feel it’s closer to the truth than the usual stories we’re fed.

            However it seems to me that your comment on the piece is not accurate. It doesn’t exactly says that drug organizations and governments are on the same team. It says (among other things) that governments favor some organizations and wage war on others so that the ones it favors can benefit from higher prices.

  3. Bates

    Volker is getting up in years. He has fought the good fight more than any other economist in DC. At least he had the gumption to say SOME things that need to be said. He could have chosen to retire and say nothing.

      1. i on the ball patriot

        The “good fight” is a fake fight, they are both sell out system tool scum bags.

        Deception is the strongest political force on the planet.

  4. Neil D

    We have to start being nice to the bankers. Their feelings have been hurt by the scorn heaped upon them and the possibility we might raise their taxes. And they might move to China and take their money with them. Then we’ll have no economy at all!

    1. DownSouth

      “Money” is a fiction, a political construction as much as anything else.

      The idea that money and the economy exist independent of politics is one of the greatest mythologies ever foisted upon humankind.

      If the bankers leave, they will leave with whatever the political regime of the time allows them to leave with.

      1. Neil D

        Wow – really? What does all that actually mean?

        Money may be a fiction, but I still use it to feed, clothe, and shelter myself. People give it to me in exchange for my services and give it to others in exchange for theirs. So call it whatever you want, I don’t really care.

        The beauty of this “fiction” is that everyone believes it. Well, almost everyone. It’s very important that everyone believe it so please stop spreading rumors! :)

        1. DownSouth

          Well let me see if I can explain it.

          In this article http://www.whatsonxiamen.com/news8079.html is a photo of $205 million dollars, mostly in US currency. It was found in the home of a drug dealer in Mexico City.

          The same “money” could also be a mere entry—-“$205,000,000”—if it appears on an appropriate ledger of a bank. In other words, we could just dispense with that huge pile of little pieces of green paper with pictures of dead presidents on them and just have nine digits appearing on a ledger. They’re both the same.

          Now you claim that the bankers “might move to China and take their money with them.” You also claim that you use money to “feed, clothe and shelter” yourself. But both of those statements are true only insofar as the government allows you, or the bankers, to do those things.

          Take Ye Gon, for instance. He had the $205 million in paper currency in his possession. But he could not go to his home country of China and “take the money with him.” The Mexican government wouldn’t let him. Now granted, it’s true that he could use the money to “feed, clothe and shelter” himself, plus make those $150,000 a hand wagers on the bacarrat table he was so fond of. But once the government decided he couldn’t do those things with the “money” any more, well he couldn’t. It’s just that simple. Money is what the government says it is. And money can be used only for what the government says it can be used for. And your claim that the bankers could “take their money with them” is true only as long as the bankers control the US government, which of course they currently do. But that could change. If the political winds in the US were to shift, the bankers’ money would disappear just as rapidly as Ye Gon’s did.

      2. Odysseus

        And so what that it’s a fiction. Does that mean it’s less valuable than “reality,” which is, in this case, somehow real coconuts exchanged for real yams? Don’t be silly. Humanity runs on fictions, and, above all, on the power of fictioning.

          1. Anonymous Jones

            Well, yeah, but analysis is a lot more f*cking precise when you acknowledge which is a fiction and which is a reality because prescriptions for fixing problems probably depend upon which kind you’re dealing with.

  5. charley


    At bottom, Volker appears to be agreeing with Minsky that financial speculation results from the creation of unproductive assets. Given this, the question becomes why capital is being diverted from productive to unproductive asset creation.

    This clearly points toward the real economy. Without defending Volker, I would argue that not enough effort has gone into examining why capital cannot be put to productive use in the economy and migrates toward purely speculative activity.

    Far from letting the ponzi masters off the hook, such an examination could lead to discovery of the sources of the capital that feed their activities.

    Remember flows. Capital comes from somewhere and goes somewhere. The money only represents the currency of the flows; it is not the actual resources being diverted to unproductive uses. Thus, real resources are being diverted from productive to unproductive ends.

    This first of these resources is labor and the unproductive employment of labor. Unless working time is reduced, no amount of regulation will stem the ponzi.

    Although it is not PC, I would ask you to consider why Marx asserted that capitalism increasingly makes superfluous labor the condition for necessary labor — that it becomes a matter of life or death for capital. This alone is the source of the ponzi, and it cannot be managed by regulation.

  6. F. Beard

    How does one regulate an inherently dishonest business, fractional reserve lending? We’ve only been trying for +300 years without success. Furthermore even lending at interest to one’s countrymen is forbidden by Deuteronomy 23:19-20

    We need tax-free private monies, including common stock, and government fiat that is legal tender for government debts only.

    We had best figure out a way to do money ethically; there are gold-bugs, socialists and worse waiting in the wings.

  7. arby

    We keep looking for a leadersship that does not exist. We can hope for the future to keep us going but the kind of leadership we need died a long time ago. I think that is why people get excited about a occasions when someone of stature speaks with voice of clarity and truth about the high priests of finance.

  8. don

    For a look at the crisis in the real economy and how it relates to the financial crisis, see:


    The financial crisis is an outcome of, rather than the root of a much deeper and structural crisis, and therefore it cannot be said that the problem is simply with deregulation and the solution re-regulation. The crisis is much more complex than a matter of mere regulation, and has much deeper roots as shown by author Paul Sweezy in ‘The Triumph of Finance Capital’, written in 1994.


    1. anon

      Thanks for the links, don. Brenner’s article discusses many of the problems that I thought Volcker was alluding to when said that the crisis got so serious because of the basic disequlibrium in the real economy. It’s difficult to tell what Volcker meant since he didn’t discuss the problems in the real economy.

      Regardless of whether one takes the view that the economic problems led to blowing bubbles (that ultimately exacerbated the underlying economic problems) in order to paper over and distract the general public from the underlying economic problems (which I lean toward) or whether deregulation led to excessive leveraging which caused the economic problems seems less relevant to me than the common points between the two views: there are real economic problems and, at best, the financial markets have exacerbated those problems instead of ameliorating them. To me, it is important that we recognize the need for fundamental reform and continue to push for that.

  9. Doug Terpstra

    Thank you, Yves, for helping us to perceive the web they weave. I suppose we can’t really fault Volcker, going on 85, for not grasping the magnitude of gambling leverage involved as the primary cause (?). (What is a quadrillion, anyway?) But we can blame the banksters and their media economists for using his mild scolding as diversion for their own crimes, and we can certainly fault Bernanke who is now indisputably part of this wicked confidence game.

    In “The Bastard Child of the Mother of All Bubbles”, Jim Quin, of The Burning Platform, quotes Bernanke on the Greenspan housing bubble:

    “We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though.” – 7/1/2005

    “Housing markets are cooling a bit. Our expectation is that the decline in activity or the slowing in activity will be moderate, that house prices will probably continue to rise.” – 2/15/2006


    Quin’s “bastard child” here is the T-bond bubble, which he is convinced will convert modest deflation into hyperinflation that makes the Mexican Peso look rock-solid.

    It’s simply astonishing that these very same economic gravediggers are still firmly entrenched in the pit and are paid handsomely to keep digging. So much for what Palin aptly calls “the hopey-changey thing”.

  10. readerOfTeaLeaves

    (Blushing….) As someone who popped on the Internet to check the state of the world at some point yesterday, and saw Volker’s speech labeled as a great feat of candor, I really appreciate this corrective analysis.
    (…still blushing….)

  11. Avg John

    In a way he is right. Our general economy has been structurally deficient for well over 15 years. We created huge bubbles as a matter of policy to keep it on its feet. Of course, no one complained about the housing bubble when the hundreds of billions of dollars was flowing into Wall Street coffers, unemployment was lower, 401k’s were skyrocketing, and it was only the neighbor down the street who lost his job to off shoring.

    I’m not saying that Wall Street was without guilt, surely they are responsible for the lion’s share, but Main Street and the average American aren’t blameless. We have enabled it with our wink and nod attitude about the ethical challenges that confront us directly each day, and our “I don’t care I got mine” attitudes.

    1. mock turtle

      you want to blame carter do you

      how nice….so lets see,

      carter presidency was sandwiched between 8 years of nixon ford, before …and 8 years of reagan followed by 4 years of bush following

      so carter …must…have…been…one…awesome…heavy duty…overpowering…Juggernaut of a president

      that his piddlely 4 years had such an overwhelming and profound effect lasting to this day

      those democrats…they are just supermen

  12. Hugh

    Volcker has not had a new idea in 30 years. He still sees the economy and finance in terms of when he was Fed chair more than 30 years ago. Carter’s economic policies and Volcker’s harsh monetary ones set the stage for the construction of the paper economy. To this day, I don’t think Volcker really understands it or his role in creating it. He grouses about some of the excesses but doesn’t grasp that this isn’t a bug but a feature.

  13. Jessica

    Yves, you are correct that Volcker’s formulation of the broader economy being the source of the crisis is bizarrely incorrect. So much so as to highlight his function as a homeopathic treatment: give the system a tiny dose of criticism to protect it against real criticism.
    On a broader level, I agree with those that the very fact that the financial sector became big enough and unregulated enough to cause so much damage comes from deep structural issues in the wider economy.
    One simple way to frame this is that for decades now the real money has been made with knowledge, not material production. Monetizing knowledge (capturing profits) is difficult and precarious in many new ways. Finance is the lowest common denominator for monetizing knowledge in a society that has barely started the transition to a knowledge-centered economy.

  14. Deus-DJ

    Can’t type any more than this for now, but thanks Yves for calling it “cognitive capture” rather than “regulatory capture”. It appears you read my criticism of that claim in your book in another thread.

  15. Psychoanalystus

    I am not very impressed. He’s part of the conspiracy, and this is just another twist in this well-coordinated saga of shameless deceit and ruthless looting of the American people.

    Psychoanalystus (the artist formerly known as Vinny)

  16. Benedict@Large

    So does this mean that Volcker is running for Summers’ soon-to-be vacated job? Add a smidge of pseudo-tough guy to pacify the base to a Reagan alumnus to pacify the opposition, and you’ve got simply the ideal resume to extend and pretend triangulation into ad nauseum.

    No matter, the circus is in town!
    It’s cotton candy, all the way down.

  17. jest

    I think everyone’s right on this one.

    1. Yes, Yves is right that the speech’s tone was overblown. So? Is that really a problem? It’s not that inconsistent from what he’s been saying for the last couple years (e.g., the only real innovation in the last 20 yrs was the ATM) and someone in the media finally gets the discussion going in a manner without buzzwords and spin. I’ll take this form of truthiness over Kudlow’s any day.

    2. I agree with Volcker’s comments that the economic malaise isn’t totally to blame on the financial sector. There are real, deep seated problems with our economy (i.e. lopsided “fair trade” agreements, Fed demonization of increases in worker pay as “unanchored inflation expectations,” dismantling of labor, a destitute education system, rising health care costs destroying the capacity of the US to compete- with GM being the poster child, etc.) that have compounding effects with the financial crisis. Combining those problems with financial parasites gives you a perfect storm in terms of employment.

    I could be wrong, but I thought he was talking about the overall employment problem having more to do than just finance; I don’t think he meant that the financial crisis wasn’t caused by the banks. That’s contrary to what he’s been saying for awhile…

    1. Yves Smith Post author


      I know you mean well, but you are falling for the story that allows the people who set the train wreck in motion to escape blame. You act as if the employment and trade story sit in isolation from what happened on the finance front. They aren’t. They are all a part of a rampant “markets uber alles” ideology run amok.

      And you do need to listen to the speech. Volcker was NOT talking re unemployment. Worse, Volcker was one of the prime architects of the use of uemployment to constrain worker bargaining power to keep inflation low.

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