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.
In fact, Volcker maintained, some of those financial innovations took us to the very brink of disaster.
He cited 60 years spent around financial markets as his bona fides and they are impressive bona fides. He broke inflation through unpopular policies that sent interest rates sky high and stymied the building industry and the general economy. There was no doubt about the seriousness of the Fed’s anti-inflation stance. He’s back in Washington as an economic adviser to the Obama administration.
Perhaps partly for shock value or the very fun of saying it to this audience, Volcker claimed the innovation in the past 25 years that made sense to him was the automatic teller machine. It’s quite useful.
He said the gathering’s responses to fixing the system post-crisis were “inadequate.” He sounded there like a tough school master unhappy with his pupils.
One idea discussed was better governance at financial institutions; more informed boards of directors. Volcker countered that the chance of boards understanding the types of complex financial products developed in the past decade were “nil.”
Volcker repeated his view that commercial banks should return to days of yore, when they were boxed in and regulated. Their duties circumscribed. Let hedge funds and others take trading risks. If they fail, they fail. Commercial banks should stay out of that business.
Another financial industry legend spoke at Horsham. George Soros, the hedge fund king of an earlier generation.
On credit default swaps, Soros likened the instrument to an insurance policy taken out by someone other than the person being insured. Then you issue a license to the policy holder to shoot the insured person. He called it a bear market warrant.
With age comes the ability for straight talk.
