Paul Volcker Speakth

NEW YORK - THE financial crisis that has plunged the United States and much of the developed world into recession is different than previous bouts of turmoil, former Federal Reserve Chairman Paul Volcker said on Monday.

'We don't know how deep it's going to be,' said Mr Volcker, whom President-elect Barack Obama has appointed to chair the President's Economic Recovery Advisory Board.

'Crises are old but this crisis is different. It's different in its enormous complexity; it's certainly different in the massive intervention of government. It's more global in scope than any previous crises.'

He said much needed to be done to restore confidence, integrity and fiduciary responsibility and the process of reordering the financial world would not be a quick one.

'But I like to think the crisis is an opportunity,' Mr Volcker added. 'It's an opportunity to do some things that in ordinary circumstances, in quieter circumstances, would not begin to be possible.'

Mr Volcker was speaking at the Museum of American Finance, where he was receiving an award for distinguished public service and financial leadership. -- REUTERS

By PAUL VOLCKER

Today, the financial crisis has reached a critical point. The sharp decline in the stock market and its volatility dramatically make the point. More important if less visible, the flow of credit through the banking system and the financial markets is seriously impaired -- even in part frozen.

For months, the real economy, apart from housing, had not been much affected by the developing crisis. Now, a full-scale recession appears unavoidable. Important state and local governments face deficits they may be unable to finance. Recessionary forces are apparent in other important countries and exchange rates are unstable.

Those are facts.

They are the culmination of economic imbalances, a succession of financial bubbles and financial crises that have been building for years. It's no wonder that confidence in markets, banks, and financial management has been badly eroded. Without effective action, fear might take hold, threatening orderly recovery.

Fortunately, there is also good reason to believe that the means are now available to turn the tide. Financial authorities, in the United States and elsewhere, are now in a position to take needed and convincing action to stabilize markets and to restore trust.

First of all, there is now clear recognition that the problem is international, and international coordination and cooperation is both necessary and underway. The days of finger pointing and schadenfreude are over. The concerted reduction in central bank interest rates is one concrete manifestation of that fact.

More important in existing circumstances is the clear determination of our Treasury, of European finance ministries, and of central banks to support and defend the stability of major international banks. That approach extends to providing fresh capital to supplement private funds if necessary.

Active efforts are underway to develop stronger netting, clearing and settlement arrangements for certain derivatives, in particular the notional trillions of credit default swaps, the absence of which has contributed to uncertainty and large demands for scarce collateral.

None of that is easy. Some of it poses risks for the taxpayer. All of it is decidedly unattractive in the sense of large official intervention in what should be private markets able to stand on their own feet. Unattractive or not in normal circumstances, the point is the needed tools to restore and maintain functioning markets are there. Now is the time to use them. To that end, the immediate and critical need is determined, forceful and persistent leadership -- extending across administrations and Congresses. Both the public and private sectors must be involved.

The inevitable recession can be moderated. The groundwork can be laid for reconstructing the financial system and the regulatory and supervisory arrangements from the bottom up. The extraordinary interventions by the government (and taxpayer) should be ended as soon as reasonably feasible.

That rebuilding will be the job of another day -- of a new administration here in the U.S., of finance ministries and central banks working together. It must draw upon the strength of the now chastened private sector. It will require more understanding of the risks embedded in so-called financial engineering and of the perverse compensation incentives that have exalted risk over prudence.

There is, and must be, recognition of the essential role that free and competitive financial markets play in a vigorous, innovative economic system. There needs to be understanding, in that context, that financial ups and downs -- and financial crises -- will be inevitable, even with responsible economic policies and sensible regulation. But never again should so much economic damage be risked by a financial structure so fragile, so overextended, so opaque as that of recent years.

Mr. Volcker was chairman of the Federal Reserve from 1979-1987.

Good to know how Volcker feels about the crisis. His views will have a big impact on how the Obama team will handle the measures to reignite the economy. Good to know Volcker is around.

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Jose Mourinho has insisted Chelsea would have won the Champions League by now if he hadn’t been forced out of the London club by billionaire Russian owner Roman Abramovich. What a load of bs... you had your chance.

The Portuguese, now in charge of Inter Milan, could only sit and watch as the Blues lost out on penalties to English rivals Manchester United in last season’s final of the Champions League, European club football’s leading competition, after leaving Stamford Bridge in September 2007.

During his three years in west London, Chelsea won two English titles, two League Cups and the FA Cup.

“We’d won absolutely everything apart from the Champions League. I would have won it with Chelsea,” he told the News of the World. “My contract was until 2011, so I would have been there for seven years. It’s enough time.”

Talk about BS of the highest order! Let me find some similar comparisons to Mourinho's arrogance. That's like Madoff saying: "They just didn't give me enough time... just another two years I would have been able to turn around Ponzi thing..., trust me"

p/s photos: Tracy Ip Chui Chui

Obama Ticking The Right Boxes

Paul Volcker, who helped tame runaway inflation in the 1980s during two terms as chairman of the Federal Reserve, has agreed to lead a new White House economic advisory committee, President-elect Barack Obama said Wednesday. He praised Mr. Volcker as one of the world’s foremost economic policy experts.

“Paul has served under both Republicans and Democrats and is held in the highest esteem for his sound and independent judgment,” Mr. Obama said, as the 6-foot 7-inch Mr. Volcker towered nearby. “He has a long and distinguished record of service to our nation, and I am pleased that he has answered the call to serve once again.”

Mr. Obama made the announcement at his third news conference in three days. The public appearances by the president-elect are intended to show Americans that his team is focusing on resolving the financial crisis, which Mr. Obama said Wednesday demands “fresh thinking and bold new ideas from the leading minds across America.”

Mr. Volcker, 81, has been providing Mr. Obama with advice on the economy for months. After briefly considering him for Treasury secretary, Mr. Obama instead asked Mr. Volcker to lead the President’s Economic Recovery Advisory Board, a new panel to be comprised of leading figures from a variety of business sectors. The group is supposed to advise Mr. Obama on how to jump-start the economy and stabilize the financial markets.

Austan Goolsbee, a University of Chicago economist who was a leading economic adviser to the Obama presidential campaign, will lead the staff of the advisory board, the president-elect said, calling him “one of America’s most promising economic minds, known for his path-breaking work on tax policy and industrial organization.”

Volcker gained an infamous reputation during his tenure as chairman of the Fed. He assumed the position amid a five-year run of inflation caused by an upswing in oil prices when the Arabs cut off exports into the U.S. as retaliation for our support of Israel. Volcker immediately took steps to reduce the total money supply. More importantly he changed the long-time Fed policy of controlling interest rates, and simply let interest rates float to their natural levels. Businesses and farmers were paying over 20 percent interest on their debt when irate farmers stormed Washington and blockaded Fed headquarters with Volcker inside. Volcker's moves as Fed Chairman did break the back of inflation as they were intended to do. Inflation peaked at 13.5 percent in 1981 and dropped to 3.2 percent in 1983. The price was a sustained unemployment rate of over 11 percent nationally during that same period, the highest since the Great Depression. Volcker's policies were good for creditors, especially his friends in Manhattan who owned bonds. But they were harsh on the American middle class and on small business.

It is both these groups, the middle class and small business, that Barack Obama has promised not to forget with his economic recovery package. But Paul Volcker's history does not indicate a compassion for the little guy. The final Democratic economic recovery plan depends on how these two men reconcile their political and economic thoughts.

Why is Paul Volcker so important? In a speech he made in 2005, he already made some important points:

"Altogether, the circumstances seem as dangerous and intractable as I can remember."

"Boomers are spending like there is no tomorrow."

"Homeownership has become a vehicle for borrowing and leveraging as much as a source of financial security."

"I come now to the heart of the problem, as a Nation we are consuming and investing, that is spending, about 6% more than we are producing. What holds it all together? - High consumption - high leverage - government deficits - What holds it all together is a really massive and growing flow of capital from abroad. A flow of capital that today runs to more than $2 Billion per day."

p/s photos: Han Ye Seul

Critical, The New Treasury Secretary

The most important appointment Obama will make over the next few days will be the Treasury Secretary. The person to replace Henry Paulson. As economics is the most difficult and pressing matter facing Obama, it is imperative that he make the right choice. Markets will rise and fall depending on who he selects.

The contenders:

a) Lawrence Summers - A renowned Harvard economist who won the John Bates Clark medal for economists under 40 in 1993, and was the Treasury Secretary under Clinton's administration. Has done it before, but under Clinton, no big financial or economic turmoil. Still an OK selection, but better than Robert Rubin definitely. His strong grasp of economics comes in handy. Summers could provide an economic lift, such as improving health care, reducing dependence on foreign energy sources and changing the tax code. He says focusing on those areas will help the economy by creating jobs and preventing families from cutting spending. Summers was among the first economists to call for a second round of economic stimulus based on infrastructure investment, which he says would help create jobs, bolster the construction industry and provide a cash infusion to municipalities. Markets to move up if he is appointed.

b) Timothy Geithner - President of New York Federal Reserve Bank. Though not well know, he should be viewed as a good selection as he was one of the early and more aggressive proponents of action to stem the crisis. Geithner would come in with an even more interventionist approach, which is what the market seems to be looking for, to solve the mess. He pushed for quicker action on Fannie & Freddie, and help strategise the bailouts of Bear Stearns and AIG. Market savvy and well regarded by Wall Street. Markets will go up slightly if he is selected.

c) Robert Rubin - another former Treasury Secretary under Clinton, ex top dog at Goldman Sachs and now a director for Citigroup. Impressive resume but largely seen as ineffective over the last 5 years. Did not forsee the crisis or counselled Citigroup properly. Was not entirely effective as Treasury Secretary. It would be a poor choice for Obama to select him. Markets will fall of Rubin is selected. Rubin is a trader, not a good economics strategist.

d) Paul Volcker - Your favourite and mine as well. Possibly the best Federal Reserve chairman ever. In his 80s, is a towering figure in U.S. monetary policy, famous for vanquishing inflation as former chairman of the Federal Reserve. Age might stop him from taking up the post. I would even just ask him to take up the post for 2 years to help guide the US through the economic landmines ahead for Obama. You can expect a sharp rally if Volcker was selected. His reputation from the 70s was unmatched. He dealth with the OPEC crisis, was brave and committed to tackle issues swiftly. Not prone to do popular stuff but effective measures. Markets will rally the strongest if Volcker is selected.

Others being mentioned include: Jon Corzine, another ex-Goldman Sachs top dog, now the Governor of New Jersey and Jamie Dimon of the unscathed JP Morgan.

p/s photos: Top, Paul Volcker with Obama Baby. Bottom, left to right, Summers, Corzine, Geithner