Tuesday, June 16, 2009

Volcker who famously urged the administration, "To take time to think this through. There is a temptation to act quickly."


The Deal

"So whatever happened to Paul Volcker?
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volcker,paul125x100.jpgAs the details pile up about what Treasury will formally recommend on regulatory reform Wednesday, you do have to wonder what happened to Paul Volcker and his suggestion in February of a new kind of "Glass-Steagall-like" separation of financial institutions. Volcker, who heads up Obama's Economic Recovery Advisory Board, made the comments at a conference, setting off some discussion among the pundits. Then, silence. Volcker himself hasn't been seen very much -- certainly not like Treasury's Tim Geithner and the seemingly irrepressible head of the Council of Economic Advisors, Larry Summers. A piece on The Huffington Post in May did report that Volcker is talking to the economics team in Treasury and advising Obama, but his office space in the Executive Office Building is empty and the HuffPo suggested that if he has an "office," it's that of CEA member Austen Goolsbee in the White House.

What does Volcker's disappearance mean? Who can tell? The most obvious speculation is that forces within the Treasury, or the White House effectively deep-sixed anything as fundamental as separating high-risk institutions to more traditional utility banks. In fact, that may well be part and parcel of the air of compromise and expedience that hangs over the entire reform process. With a few exceptions like the disappearing Office of Thrift Supervision, most of the lineup of regulators will remain the same. The Securities and Exchange Commission and the Commodity Futures Trading Commission will survive, a consumer products commission will be set up, and a council of regulators will sit over everything, like some regulatory board of directors. It's still a little unclear how much power the Federal Reserve will accumulate, though it seems probable that it will get some role as a systemic overseer.

This entire setup appears fragmented and inefficient, the worst of both worlds. It's also bound to be expensive. Why anyone thought that a council of regulators was a good idea beyond political expedience is beyond me. Nothing that's been leaked so far, however, involves any kind of fundamental alteration in the financial system itself.

A separation of financial institutions akin to Glass-Steagall had a number of complexities and difficulties, but it did try to wrestle with the management of risk question and the trade-off between safety and competitiveness. What we seem to be heading for is an intensely Balkanized regulatory apparatus attempting to supervise a financial system that has converged even more than before Bear Stearns Cos.' collapse. Even if the Fed does prove to be an effective systemic regulator -- and its record as a regulator is spotty at best -- how this council will operate in a crisis is a little scary. Half the folks on this council are currently engaged in desperate attempts to undermine each other, or are fighting over Vikram Pandit's future or on the oversight of derivatives. Some dislike each other; others simply want to establish bureaucratic dominance. All this will only get worse as Congress, with its cast of intense self-interested characters, swings into action.

Meanwhile, it would be good to hear what Volcker has to say, and to reveal what exactly happened to his interest in a return to a Glass-Steagall-like arrangement. After all, it's Volcker who famously urged the administration, "To take time to think this through. There is a temptation to act quickly." - Robert Teitelman

Robert Teitelman is the editor in chief of The Deal."

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