Paul Volker's Dire Assessment Of The Economy

Former Federal Reserve Chairman, Paul Volker, offered some unsettling comments to a gathering in London today.

As reported by the Telegraph, Mr. Volker described the current situation as unlike anything he has ever seen (and he has seen a lot):

"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."

I'm old enough to remember the Carter years and well remember the catastrophe that credit controls wrought. Any suggestion that we are in a period such as that is alarming indeed. Mr. Volker also had an interesting comment regarding his advice to Barack Obama. Remember, he is one of his financial advisers.

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."

That advice is going to put Mr. Obama in a difficult place with his own party, particularly the older, more liberal part of the party, to which most of the leadership of the House and Senate are a part. Campaign promises and natural inclinations will mitigate in favor of throwing money. It is truly going to be a test for Obama to repress that road if indeed that is what he means to do.

Just for the fun of it, let me leave you with Volker's assessment of where the blame should lie for the mess. It's not original but I like the way he put it.

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.

Tom Lindmark