Is the US Financial Crisis Over?

This frankness and honest statement of the situation is the reason that Paul Volcker, one of the most credible advisors in the Obama Administration, is a marginalized voice as compared to Larry Summers and Turbo Tim. Ironic, because only by assuming Volcker's leadership style can the US President hope to get his country out of this cycle of monetary bubbles, systemic fragility, and chronic imbalances driven by an outsized, counterproductive financial sector.

DER SPIEGEL: But even though there are still more people being fired than hired, the Chairman of the Federal Reserve Ben Bernanke is saying that the recession is technically over. Do you agree with him?

Paul Volcker: You know, people get very technical about these things. We had a quarter of increased growth but I don't think we are out of the woods.

SPIEGEL: You expect a backlash?

Volcker: The recovery is quite slow and I expect it to continue to be pretty slow and restrained for a variety of reasons and the possibility of a relapse can't be entirely discounted. I'm not predicting it but I think we have to be careful.

SPIEGEL: What is the difference between this deep recession and all the other recessions we have seen since World War II?

Volcker: What complicates this situation, as compared to the ordinary garden variety recession, is that we have this financial collapse on top of an economic disequilibrium. Too much consumption and too little investment, too many imports and too few exports. We have not been on a sustainable economic track and that has to be changed. But those changes don't come overnight, they don't come in a quarter, they don't come in a year. You can begin them but that is a process that takes time. If we don't make that adjustment and if we again pump up consumption, we will just walk into another crisis.

SPIEGEL: The US has not yet instituted any kind of reform policy. What we see is the government and the Federal Reserve pouring money into the economy. If one looks beyond that money, one sees that the economy is in fact still shrinking.

Volcker: What should I say? That's right. We have not yet achieved self-reinforcing recovery. We are heavily dependent upon government support so far. We are on a government support system, both in the financial markets and in the economy...

The rest of the interview can be read here

The net Treasury International Capital flows came in light today at 20.7B versus 38.7B expected. GE was a drag on the big caps because of Immelt's lack of enthusiasm for any US recovery.

As a reminder, tomorrow the FOMC will make its December rate decision public at 2:15 EST. Traditationally there will be shenanigans abounding. In the morning the US will be revealing its premiere fantasy economy number, the Consumer Price Index.

As a heads up, Gold often gets hit with a bear raid on FOMC day. Since the miners were hit a bit today with possible front-running that might be a good bet. Who can say in these thin markets?

The US economy is much like this stock market rally: big on show and thin on substance.

Volcker's Vision of a Return to Narrow Banking

A return to 'narrow banking' is in the cards. This is the kind of bank which takes depositors funds and originates and services loans to its own customers.

These banks will be separate from investment banks and hedge funds, which will perform the speculation and packaging, and what can loosely be called financial engineering.

But look for much more uniform regulation and transparency to appear in these non-banking operations, and less acceptance for 'dark pools' and opaque market manipulation.

And for those who say we will lose this type of person to less regulated overseas venues, there will be a new attitude to cross border banking and restrictions on the activity of institutions that do not adhere to a uniform set of standards.

It will be an even greater step in the right direction if we can realize that this same sort of regime should prevail in overseas trade as well. There will be little taste for the toleration of sweatshops, child labor, and the virtual slavery that multinational business craves, and justifies with the most venal and shallow of arguments.

AP
Volcker sees crisis leading to global regulation
By Eileen Aj Connelly, AP Business Writer
Friday February 20, 6:29 pm ET

Volcker sees greater international cooperation on regulations growing from economic crisis

NEW YORK (AP) -- "Even the experts don't quite know what's going on."

Speaking to a number of those experts Friday, Paul Volcker, a top economic adviser to President Barack Obama, cited not only the lack of understanding of the global financial meltdown but the "shocking" speed with which it had spread across the world.

"One year ago, we would have said things were tough in the United States, but the rest of the world was holding up," Volcker told a conference featuring Nobel laureates, economists and investors at Columbia University in New York. "The rest of the world has not held up."

In fact, the 81-year-old former chairman of the Federal Reserve said, "I don't remember any time, maybe even the Great Depression, when things went down quite so fast."

He noted that industrial production is falling in countries across the globe faster than in the U.S., one result of the decline caused by the breakdown of unbridled financial markets that operated on a global scale.

"It's broken down in the face of almost all expectation and prediction," he noted.

Volcker didn't offer specifics on how long he thinks the recession will last or what will help start a recovery. But he predicted there will be some lasting lessons from the experience.

"I don't believe it will be forgotten ... and we will revert to the kind of financial system we had before the crisis," he said.

While he assured his audience of his confidence that capitalism will survive, Volcker said stronger regulations are needed to protect the world economy from such future shocks.

And he said he is concerned about the amount of power central banks, treasuries and regulatory agencies have acquired while trying to contain the meltdown.

"It is evident in the United States, and not just in the United States, the central bank is taking on a role that is way beyond what a central bank should be taking," he said.

Volcker stressed the importance of international cooperation in creating a new regulatory framework, particularly for major banks that operate across national boundaries -- the reverse of what's happened in recent years.

"The more international agreement we have on where we want to get to, the better off we'll be," Volcker said.

And while major banks should be more tightly controlled and less able to make the sort of risky bets that led to their current debacle, Volcker said there should also be more oversight of some kind for hedge funds, equity funds and the remaining investment banks.

He scoffed at the notion that those entities must be free to innovate -- stating that financial "innovations" like asset backed securities and credit default swaps have brought few benefits. The most important "innovation" in banking for most people in the last 20 or 30 years, he maintained, is the automatic teller machine.

Tall Paul Delivers a Dismal Diagnosis for the US Economy

As much as we admire Paul Volcker, we can't help but notice that he, like so many others, did not have all that much to say while Greenspan and his merry banksters were running around setting fire to the economy while President Zero fiddled.

Also, he is not offering much in the way of innovation or suggestions for the incoming administration, at least so far.

Perhaps they should trigger a nasty inflation and then they can roll Volcker out to fix it. Hmmm, that seems to be in the works.

The 1930's script says that we have a Republican minority and a conservative Supreme court that block the many attempts of an incoming Democratic president to help the general public survive a devastating economic downturn, after a decade of seriously greasing the elites' monetary skids, pushing us to the brink of domestic insurrection, until it takes a world war to pull us out.

Wow, déjà vu!

UK Telegraph
Volcker issues dire warning on slump
By Ambrose Evans-Pritchard
10:39 PM GMT 17 Nov 2008

Paul Volcker, the former chairman of the US Federal Reserve, has warned that the economic slump has begun to metastasise after a shocking collapse in output over the past two months, threatening to overwhelm the incoming Obama administration as it struggles to restore confidence.

"What this crisis reveals is a broken financial system like no other in my lifetime," he told a conference at Lombard Street Research in London.

"Normal monetary policy is not able to get money flowing. The trouble is that, even with all this [government] protection, the market is not moving again. The only other time we have seen the US economy drop as suddenly as this was when the Carter administration imposed credit controls, which was artificial."

His comments come as the blizzard of dire data in the US continues to crush spirits. The Empire State index of manufacturing dropped to minus 24.6 in October, the lowest ever recorded. Paul Ashworth, US economist at Capital Economics, said business spending was now going into "meltdown", compounding the collapse in consumer spending that is already under way.

Mr Volcker, an adviser to President-Elect Barack Obama and a short-list candidate for Treasury Secretary, warned that it is already too late to avoid a severe downturn even if the credit markets stabilise over coming months. "I don't think anybody thinks we're going to get through this recession in a hurry," he said. (Perhaps Paul needs to send a postcard update to the talking heads at CNBC and Bloomberg - Jesse)

He advised Mr Obama to tread a fine line, embarking on bold action with a "compelling economic logic" rather than scattering fiscal stimulus or resorting to a wholesale bail-out of Detroit. "He can't just throw money at the auto industry."

Mr Volcker is a towering figure in the US, praised for taming the great inflation of the late 1970s with unpopular monetary rigour. He is no friend of Alan Greenspan, who replaced him at the Fed and presided over credit excess that pushed private debt to 300pc of GDP. (Funny how Greenspan has so few friends now, but was so widely lionized by the corporate support structure while he was helping to destroy the economy - Jesse)

"There has been leveraging in the economy beyond imagination, and nobody was saying we need to do something," he said. "There are cycles in human nature and it is up to regulators to moderate these excesses. Alan was not a big regulator." (There were quite a few people warning about a credit bubble but they were largely shouted down, ignored, and dismissed by the cognoscenti, largely fueled by conservative think tanks and corporate funding - Jesse)

Even so, he said the arch-culprit was the bonus system that allowed bankers to draw forward "tremendous rewards" before the disastrous consequences of their actions became clear, as well as the new means of credit alchemy that let them slice and dice mortgage debt into packages that disguised risk. (So let's make sure we try to prolong that system by handing them billions of dollars in taxpayer money without conditions or serious reform - Jesse)