Randomly Noted

It was just about a full year ago that the President of the U.S. stood in front of television cameras and referred to the “tall guy behind me.”

The tall guy was Paul Volcker, that day near the crest of a remarkable political renaissance that saw the “Volcker rule” go from Volcker’s seemingly singular quest to official Obama administration policy. Eventually, it became a still controversial part of financial regulatory reform.

The “Volcker rule” bars commercial banks from engaging in certain types of proprietary trading. Volcker’s simple point: banks shouldn’t be taking big risks when their deposits carry government insurance. If they want to trade for their own accounts, they should stop being banks or spin off the units that do the trading.

The news today is that Volcker, now 83, is going to leave his role as head of the President’s Economic Recovery Advisory Board.

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The inestimable Paul Volcker has added his voice to those (including this blogger) describing the current, shallow U.S. recovery as the “Long Slog.”

Quoted Wednesday speaking in Canada by Dow Jones Newswires’ Don Curren, former Federal Reserve Chairman Volcker said of the U.S. economy, “It’s going to be a considerably long slog.”

The seemingly ageless Volcker is remarkably again a man of great influence on the financial events of the day as Congressional conferees try to hammer out financial regulatory reform. Some version of the “Volcker rule,” which would ban insured banks from participating in risky proprietary trading, is expected to be a key feature of the final legislation.

The Long Slog follows the Great Recession, the consensus moniker for the downturn now past. If, as some fear, we might be headed back to recession in a so-called double dip, the Great Recession name will have to be revised, as will the Long Slog. If we do double dip, which is considered unlikely by many observers, coming up with a new name will be among the least of our problems.

For now, I’m sticking with the Long Slog as a forecast and a descriptive name.

If we think about the financial crisis as coming in two distinct waves, this second and current wave highlighted by sovereign debt issues finds politicians around the world much less concerned about upsetting markets.

When the credit crisis settled into the scariest part of its first phase (financial sector distress) in late 2008, you’ll recall the U.S. Congress first saw fit not to pass the so-called TARP legislation that set aside vast sums of money to save banks and other financial institutions.

The U.S. stock market promptly swooned and the politicians collectively rethought their position. TARP passed and despite significant criticism the aid did the trick of keeping  a credit squeeze and deep recession from turning into something worse.

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At least for the day, the most powerful man in the U.S. financial industry and for equities markets is 82 years old, a man who ended his leadership of the Federal Reserve more than 20 years ago.

But Paul Volcker is back. Big time. Reportedly on the margins of the Obama administration even in his current role as an adviser, “the tall guy behind me,” in the words today of President Barack Obama, is back on stage figuratively and literally.

As the president announced two major initiatives that would radically change the world of America’s big banks, he was flanked by the Treasury Secretary, Tim Geithner, and economic adviser Larry Summers. He had with him two key Congressional leaders, Rep. Barney Frank, D-Mass., and Sen. Christopher Dodd, D- Conn. Importantly, he had Volcker and he had another regulatory veteran who’s been a straight shooter unbound by ideological restraints or misplaced party fealty. That’s William Donaldson, former head of the Securities and Exchange Commission.

Obama thanked both Volcker and Donaldson for their counsel, which, given the nature of the Obama proposals, was “old school” in more senses than simply a reference to the vast combined experience of both men.  

Agree with it or not, the “Volcker Rule,” enunciated by the president earlier today that would keep a bank from having anything to do with investment vehicles such as hedge or private equity funds, certainly signals Volcker’s return.

It is a fascinating resurrection. Volcker himself hasn’t changed his thinking. In fact, the consistency, strength and clarity of his convictions is what sets Volcker apart from so many other financial leaders inside or outside government. He tells it like he sees it and always has.

Just last month Volcker was pushing the essence of what’s now the “Volcker Rule” to a group of European bankers gathered at a Wall Street Journal conference in Horsham, England. I wrote then that he sounded like a disappointed and tough school master as he dismissed the bankers’ ideas for regulatory reform as “inadequate.” 

What has changed is the environment. The heavy, popular furor as big bank profits and big bonuses are rolled out likely played a role in the new Obama plan. That plan includes flat-out limits on bank size and restrictions on industry consolidation.

The election of a Republican as U.S. senator in Massachusetts, marking a  power shift in the Senate, might also have influenced Volcker’s rise and today’s program. Maybe the populist move is an attempt to get back on the favorable side of American voters.

Obama seemed a man trying to pick a fight with the banking industry. He used the word “obscene” again to talk about bonuses. He referred to a “binge of irresponsibility” by bankers that helped bring us last year to the edge of a second Great Depression. He scored bank industry lobbyists.

If enacted by Congress, these two points really do change the banking industry. Government involvement is significant. Bank freedom is clipped. Participants in the stock market know it and they don’t like it. The Dow Jones Industrial Average is down more than 200 points.

He left the helm of the Federal Reserve more than 20 years ago. He’s in his 80s.

And yet Paul Volcker has lost none of the fire and brimstone, moral indignation and personal authority that helped him lead the successful fight  in the 1980s against real, entrenched inflation in the U.S.

That thunder was on display today in Horsham, England, as Volcker addressed 100 or so leading bankers, investors and regulators gathered for The Wall Street Journal’s Future of Finance Initiative.

He scolded the gathering for a lack of industry leadership on compensation. He said no one has ever shown him any link between financial product innovation and a benefit to real economies. He said economic growth was higher at times when there was a lot less innovation.

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One consistent feature of revolution is that establishment voices are ignored and voices from the wilderness become mainstream.

So, in that respect at least and perhaps in others, we may have a revolution going on regarding the U.S. Federal Reserve.

Think about some of the major players involved in Thursday’s remarkable vote by the House Financial Services Committee to essentially let a Congressional watchdog expose and second-guess Fed interest rate deliberations and decisions as well as loans to individual banks.

Though not yet law, the vote in itself upsets a rare and long-standing bipartisan consensus that rightfully acknowledges the importance of independence in monetary policy.

The sponsor of the legislation is Rep. Ron Paul, R-Texas, who in the early 1980s was a lonely voice in the House talking about a return to the gold standard and criticizing the U.S. central bank.

Paul hasn’t changed his views, but post-meltdown and the current  Washington search for whom to blame, he has plenty of company.

On the other side of the argument are men whose words on the subject of monetary policy and its proper conduct used to be taken by most in Congress as gospel handed down from on high. They are former Federal Reserve Chairmen Alan Greenspan and Paul Volcker.

The two authored a letter earlier this month to Chairman Barney Frank, D-Mass., of the House Financial Service Committee, and its ranking member, Rep. Spencer Bachus, R-AL.

“We can assure you that this (current) protection of the internal deliberations in reaching decisions that will affect market conditions and could expose sensitive information about particular institutions is indispensable in the Federal Reserve’s conduct of monetary policy,” the two men wrote. Indispensable is a pretty strong word.

But the committee went with Rep. Paul.

Now, journalists are generally supporters of  transparency, so backing continued Fed secrecy is a bit odd. Still, it stands to reason that knowing the Government Accountability Office is going to come by a couple of months later, read the monetary policy debate transcripts and perhaps pass some after-the-fact judgment on the job you are doing is going to chill free-wheeling debate in the corridors and meeting rooms of the Federal Reserve.

And exposing the names of banks that temporarily need Fed help might make that need for assistance quickly move from temporary to permanent.

If the goal truly is more transparency, instead of greater Congressional control or some sort of intimidation by Congressional oversight, move up the time when transcripts of Fed interest rate policy meetings are released to the public. Now that time frame is five years. It could be moved to two years without jeopardizing Fed independence.

No one is arguing the Fed is perfect. No group of humans dealing with imperfect information will come close. But a quote in The Wall Street Journal from Sen. Jim DeMint,  R-SC, is telling.

“If there’s anything worse than a secret Federal Reserve, it’s Congress controlling it.”

If you were to choose one person most responsible for bringing  1970s-early 1980s rampant U.S. inflation under control, could you think of anyone other than Paul Volcker, who led the Federal Reserve during those years? Not very likely.

So the venerable Volcker, now 81, and an adviser to President Barack Obama, addressed the House Financial Services Committee Thursday on regulatory reform. (Go to House Committee Website here and click on The Honorable Paul Volcker to see prepared remarks).

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Some well-respected Cassandras have formed a chorus in the past couple of days, convincingly describing the price sure to be paid for the huge U.S. fiscal deficit spending being rung up at a remarkable rate.

In their own ways, a leading bond investor and a past and present chair of the Federal Reserve have sounded alarms after markets already have gone about their practical work of turning troubling forecasts into current price action.

Bond guru Bill Gross spruces up his much read commentary on all things investable with personal references and quirky analysis. In his latest, he invokes the folk wisdom of an earlier generation’s popular singer – Tennessee Ernie Ford – to illustrate the depths of the problem faced by the U.S. government, which is piling up massive fiscal deficits in order to cushion the fall of the economy and the financial sector.

Before we get to the lyrics, there’s this telling quote from PIMCO Managing Director Gross’s latest missive in reference to Washington assurances that political leaders are aware that deficits at some point have to come down and come down hard. It’s “hard to comprehend,” Gross writes, “how that more balanced rabbit can be pulled out of Washington’s hat.”

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When Alan Greenspan led the Federal Reserve, his nearly every appearance before the U.S. Congress was a victory lap. Most representatives and Senators of both parties praised his work and sought his blessing to bolster their own budget or regulatory views.

It’s not that way anymore. An article today by Dow Jones Newswires reporter Michael Crittenden says a bipartisan group of U.S. House members have sponsored a bill to ask the Government Accountability Office to audit the many programs the Fed has in place to support and revive the financial services sector. Sponsors include the chairman and lead Republican of the House Oversight and Government Reform Committee.

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Add another stunner to the list of hard-to-believe events during these past 18 months that have turned the U.S. financial world on its head.

Or, at this point, a potential stunner. The Federal Reserve, historically a most opaque government body, is considering holding regular press conferences, The Wall Street Journal reported.

Fed Chairman Ben Bernanke’s recent appearance taking questions at the National Press Club was “seen by some in the bank as a dry run and as evidence they could pull off such conferences without disrupting markets,” reported the Journal’s Jon Hilsenrath. “A decision on the move hasn’t been reached.” (WSJ Story) (WSJ Video)

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