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Every administration has a key player whose resignation signals that
a major rift is about to open. And President Obama's inner circle may
be starting to show such a sign as former Fed chief Paul Volcker is reportedly
having issues with some of the president's economic policy.
So where's the rift? Mr. Volcker wants the president to reinstate the Glass-Steagall
act, the law that separated banks from investment banks after the Great Depression,
and was abolished during the Clinton administration. There are some, Volcker
included, that blame the abolition of Glass-Steagall as a major contributor to
the subprime mortgage meltdown and the ensuing recession. The reason, of course,
is that plain vanilla banks got into the high risk business of investment banking,
and when things soured, the risk affected their lending business, and here we
are.
According to The New York Times, Volcker "wants the nation’s banks to be prohibited
from owning and trading risky securities, the very practice that got the biggest
ones into deep trouble in 2008. And the administration is saying no, it will
not separate commercial banking from investment operations." Volcker denies that
he "pounding the desk all the time" but insists "I am making my point," in a
recent interview.
At the center of the argument is the fact that Volcker wants to repeal Glass-Steagall.
Meanwhile Obama, according to The Times: "would let the giants survive, but would
regulate them extensively, so they could not get themselves and the nation into
trouble again. While the administration’s proposal languishes, giants like Goldman
Sachs have re-engaged in old trading practices, once again earning big profits
and planning big bonuses."
Volcker argues "that regulation by itself will not work. Sooner or later, the
giants, in pursuit of profits, will get into trouble. The administration should
accept this and shield commercial banking from Wall Street’s wild ways." Instead
he suggests that the only solution is to split up the giants. If that happens "JPMorgan
Chase would have to give up the trading operations acquired from Bear Stearns.
Bank of America and Merrill Lynch would go back to being separate companies.
Goldman Sachs could no longer be a bank holding company."
So what's his solution? For banks, Volcker suggests the following: "commercial
banks would take deposits, manage the nation’s payments system, make standard
loans and even trade securities for their customers — just not for themselves.
The government, in return, would rescue banks that fail." In turn, investment
banks would "be free to buy and sell securities for their own accounts, borrowing
to leverage these trades and thus multiplying the profits, and the risks." The
key is that "Being separated from banks, the investment houses would no longer
have access to federally insured deposits to finance this trading. If one failed,
the government would supervise an orderly liquidation. None would be too big
to fail — a designation that could arise for a handful of institutions under
the administration’s proposal."
That approach, which worked for 70 plus years, seems to be too much for the Obama
administration to latch onto, for whatever reason, even if it comes from the
mind of a guy who actually did some good things for the global financial system
during his stint at the Federal Reserve.
So what's the alternative? Well, for one thing Volcker, according to The Times
is nearly "alone" in backing this line of thinking, despite his getting support
from the likes of other Democrats like "Joseph E. Stiglitz, a Nobel laureate
in economics at Columbia and a former official in the Clinton administration."
One thing's clear, Obama has the de facto backing of Alan Greenspan, who backed
the repeal of Glass-Steagall, one of the few things we disagreed with Greenspan
on during his time at the Fed.
So what's ahead for Volcker? He is trying to be politically correct, by noting
that he continues to work with the administration and that he agrees with "80
percent" of Obama's economic policy. But the fact is that "his disagreement with
the Obama people on whether to restore some version of Glass-Steagall appears
to have contributed to published reports that his influence in the administration
is fading and that he is rarely if ever in the small Washington office assigned
to him." Instead, The Times reports that Volcker "His disagreement with the Obama
people on whether to restore some version of Glass-Steagall appears to have contributed
to published reports that his influence in the administration is fading and that
he is rarely if ever in the small Washington office assigned to him."
What's he doing? For one thing, he says "“I did not have influence to start with.”
But he sure did have the effect of making Obama's clearly misguided economic
policies seem credible during the election.
Conclusion
If Paul Volcker resigns, even what seems to be a largely ceremonial post,
in our opinion, it could be a sign that there is rising unhappiness inside
the White House.
It happens to every administration. But it usually happens after they have been
re-elected to a second term. Clinton had his exodus. And so did Bush II. Aside
from the wear and tear of the grind, many times people become disillusioned.
Few are saying it, but it's clear. Obama is having to fight extremely hard for
every yard of political gain that he's getting. The centerpiece of his administration,
regardless of his focus on health care, is economic policy. He blames Bush for
all his troubles, but as time passes, the public is looking to him for solutions.
By leaving the a system that has caused problems in place, he is just setting
himself up for trouble down the road.
Think about it this way. The stock market crashed in 1987, but the economy didn't.
In 1989, the stock market crashed as the U.S. prepared to invade Iraq. But the
economy didn't. In 1994,the same thing happened. We had a recession, but nothing
like the current scenario.
Guess what? The Glass-Steagall act was still in place. We think Volcker is onto
something. And we think that when he pulls up shop, it will be a sign that there
is more trouble ahead for the Obama camp. For the markets, it will be another
opportunity to handicap U.S. bonds, and the dollar.
The stock market is starting to look toxic enough on its own already.
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