Money Sage

Like everyone else, we have watched Paul Volcker's progressive marginalization by the Obama Administration, most importantly, by the President himself. A much touted "advisor" and wise man whom candidate Obama listened to carefully, Volcker's real role seems to have been to lend a certain respectability and create an aura of legitimacy for candidate Obama. Once the election was won, and Obama installed in the White House, Volcker was, to quote the Witch of Endor, consigned to "the vasty deep." The President surrounded himself by the "tried and tested" old hands, Bernanke and Geithner, and brought to the fore Mr. Summers, a respected economist whose forecasts reportedly have been considerably less reliable than the toss of a coin.

In truth, the President was hardly in a position to make any radical departures in monetary and regulatory policy, given his profound ignorance of and inexperience dealing with these subjects, and given the frightful crisis through which the financial markets were passing. He had, in fact, no practicable choice at that time, save to allow the firemen to damp the flames of the fire they themselves had so central a role in setting in the first place. Moreover, as the late Richard M. Nixon noted: "We are all Keynesians now."

In addition to these factors, was the all-important POLITICAL CALCULATION. Having suffered horrendously at the hands of the elite -- the big banks, the monetary and fiscal policymakers, the politicians ensconced in their moated castles at both ends of Pennsylvania Avenue, the K Street and Wall Street lawyers and lobbyists -- the common herd was not too keen on intensifying their immediate and future suffering by supporting more prudent fiscal and monetary policies. Thus, all the stars were in alignment, and our consensus-seeking and consensus-following president was clear on the path he must follow.

Volcker, on the other hand, must be regarded as a truly great man. This man was fearless in the execution of his very well-founded and very sound principles and beliefs, as he demonstrated with such marvelous long term effect the harsh monetary policy he felt constrained to impose to rectify 15 years of government overspending, over-borrowing, and excessive monetary inflationism. Volcker disregarded intense criticism and anger and opposition in very influential business and political circles, and carried on as if they did not exist. This is a very, very rare species of decision-maker at the highest rungs of government, where toadyism, craven obedience to the boss, and the ubiquitous impulse to tell the leaders what they wish to hear and do what they wish them to do governs almost all decision-making and advice.

Obama found kindred spirits, well attuned to this bureaucratic and politicized milieu, in the person of Messrs. Bernanke, Geithner, and Summers. We would not see these folk are spineless, but we will not assert the contrary. The reader may form his own judgment.

Volcker, as was customary for him, actually SAID what he THOUGHT. Moreover, we did not see him trim his sails in order to curry favor with the president, a truly unique standout from others. Since it did not appear that the president wished to hear what Volcker suggested quite clearly -- that the government MUST NOT engage in inflationary money-printing and must not allow the banks to do as they wished after bailing them out, and thereby destroying any restraining effect of the downside of "moral hazard" (i.e., if you speculate and lose, you LOSE; you do not have your losses covered by the Federal Reserve, the Treasury, or Congress: after all, if that is the case, then it would be perfectly rational to gamble a l'outrance knowing you would keep the vast winnings if you bet correctly, and would be bailed out by the taxpayer if you didn't)-- his advice was ignored and he was de facto excluded from the inner circle.

Now, the President has OSTENSIBLY TURNED to Volcker. The "Volcker Rule" is essentially a restoration of the Glass-Steagall Act, and a cancellation of the Clinton (Democratic) Administration's repeal of Glass Steagall.

Human memories are short, it would seem, particularly when a memory is likely to spoil the party. Glass-Steagall -- the separation of investment banking from commercial banking -- was enacted for reasons of PROFOUND MOMENT. The consequences of banks' gambling with depositor money led to a VASTLY INTENSIFIED version of the normal down portion of the business cycle. Of course, the ability of banks to coin money for themselves was restricted, the downside of this separation.

Former Chairman Alan Greenspan, with the support of FED Governor Bernanke, was quite certain that the BANKS WOULD REGULATE THEMSELVES, so he chose not to bother with this burdensome and somewhat unpalatable chore. Moreover, Greenspan KNEW that the banks would limit effectively the risk they took. This, DESPITE a 200-hundred year financial history of banks running amuck during each boom phase of the business cycle, intensifying greatly each subsequent -- and inevitable -- economic contraction. Never mind history if it interferes with one's wishful thinking or the interest group pressures of the banks and their lobbyists and associated friendly legislators.

Volcker said NO to all of this. Now, after being effectively discarded, the president has restored him to the inner circle, AND Obama now embraces Volcker's practical -- if hardly revolutionary -- stance that Glass-Steagall be returned, one way or the other, to its rightful place. The president, of course, is acting on POLITICAL PRESSURE of great magnitude, demonstrated most recently in the Massachussetts senatorial upset. Political survival requires Obama & Co. to don the attire of populist Don Quixote's, tilting lances at the banks. It is important for Obama and for the congressional Democrats to DISTRACT PIBLIC ATTENTION from the fact that it was Obama, the supposed populist and income-redistributor who, to paraphrase Jefferson in another regard, GAVE TRILLIONS TO BAIL OUT THE BANKS BUT NOT A PENNY for the huddled masses.

Truly, the bankers and the financial elite of this country should crown Obama with laurels: no conservative Republican president WOULD HAVE DARED to implement this incredible give-away to the banks WITHOUT CONDITIONS.

In truth, if Obama did not exist, the banks and their allies would have had to create him.

Moneysage 2009 - copyright