Paul Volcker's World Banker Wake-Up Call

The poor bankers. Now Paul Volcker is giving them hell.

Volcker was the last central banker in America to have any real integrity. He saw what needed to be done and he did it. He hiked up rates and brought consumer price inflation under control. Thus began the bull market in bonds that continues to this day…29 years later.

Volcker saved the dollar…and saved the US economy from a worse bout of stagflation.

Circumstances are very different today. Now, our central bankers are trying to weaken the dollar. They see it as a way to escape debt and get out of a depression. This is, by the way, the depression caused by their own loose-money credit policies. Under the influence of artificially low interest rates, people borrowed too much. Then, they had to cut back…creating today’s depression.

Bernanke and company think they can hold off a correction forever – by increasing the amount of cash and credit available.

How does that work, again? People have too much debt…so you give them more, right? Investors and businessmen made too many mistakes…so you enable them to keep making them, right? The bankers lent too much money to too many people who couldn’t pay it back, so you insist that they offer more credit, right?

Everyone is mad at bankers. Not us, of course. We pet underdogs. We champion lost causes. We stand by diehards.

As far as we’re concerned, the bankers stole their money fair and square.

But the poor English bankers aren’t getting away with it. The sourpuss government of Gordon Brown just hit them with a 50% super-tax on their bonuses. Boo hoo.

And here’s Paul Volcker, as reported in the London Telegraph, telling them to wise up:

The former US Federal Reserve chairman told an audience that included some of the world’s most senior financiers that their industry’s “single most important” contribution in the last 25 years has been automatic telling machines, which he said had at least proved “useful”. Echoing FSA chairman Lord Turner’s comments that banks are “socially useless”, Mr. Volcker told delegates who had been discussing how to rebuild the financial system to “wake up”. He said credit default swaps and collateralized debt obligations had taken the economy “right to the brink of disaster” and added that the economy had grown at “greater rates of speed” during the 1960s without such products. When one stunned audience member suggested that Mr. Volcker did not really mean bond markets and securitizations had contributed “nothing at all”, he replied: “You can innovate as much as you like, but do it within a structure that doesn’t put the whole economy at risk.” He said he agreed with George Soros, the billionaire investor, who said investment banks must stick to serving clients and “proprietary trading should be pushed out of investment banks and to hedge funds where they belong.”

The Daily Reckoning