Reading Paul A. Volcker

June 26, 2009 5:45 PM

Paul Volcker is always a rewarding read. He is a balanced straight-thinker. With the Internet, the cost of reading Volcker is only the time it takes to read plus the necessary additional effort to think about what he has said. A recent example is Volcker on the economy, the international monetary system, and financial reform in Beijing on June 11. I found the following points interesting.

On the economy, Volcker looks for recovery, but it will be a long slog in which, for the time being, inflationary pressures are not at all likely. For the medium term, he carefully links the economic and financial challenges facing the United States and China.

On the international monetary system, Volcker regrets that international monetary arrangements have not provided what he sees as a needed element of discipline for either surplus or deficit countries. He argues that a world currency is justified by the logic of a globalized financial system but, in its absence, the dollar has provided a workable, pragmatic approach. He goes on to ask whether it is in the long-run interest of the United States itself to provide what he describes as a global public good in the form of an international currency.

On financial reform, Volcker favors a focal point of responsibility for system-wide oversight and supervision for which the central bank is a natural, but not the only, choice. However, because of moral hazard concerns, he would confine access to the safety net to deposit-taking institutions operating under limits in the nature of their direct and indirect activities, including their proprietary trading. For the remaining financial institutions, he endorses their timely resolution should they fail. At the same time, he is skeptical about imposing regulatory requirements on hedge funds and private equity firms. International consistency is important in everything, particularly accounting standards such as fair-value standards, but political bodies are not the right venue for reaching such judgments.

All stimulating food for thought.

Note: I have known and worked with and for Paul Volcker since 1972. I am a fan even when we disagree.