Posted on 12/09/2009 8:17:41 AM PST by AreaMan
By Louise Armitstead
Published: 9:41PM GMT 08 Dec 2009
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 collateralised 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 securitisations 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".
Mr Volcker argued that banks did have a vital role to play as holders of ...
(Excerpt) Read more at telegraph.co.uk ...
Volcker is not exactly a tech-savvy guy. Volcker is the old-fashioned pencil and yellow pad type!
Even in the late 1980's when PC's were gaining a place in America business and mainframes were deeply embedded in all operations, Volcker made a statement on the steps of the Federal Hall on Wall Sreet (in front of the NYSE) that he didn't believe computers of any kind had improved productivity in American business.
Volcker was our best Federal Reserve chairman. Greenspan was an idiot. He liked derivatives saying they were new and innovative ways to hedge against risk. Instead they blew up the banking system and Wall Street while Greenspan looked on like an idiot. Same for Chris Cox
Word!
ATMs are a lot more than 25 years old. I can remember using them in the early 70s.
Paul Volcker’s point is that derivatives have brought us nothing but trouble. Just because Wall Street is busy with computers concocting derivatives and credit default swaps, doesn’t mean they are doing anything useful except bringing home larger bonuses
You as a taxpayer are paying for Wall Street’s fun and games
And he was right. At that point there was no measurable gain in productivity traceable to computer usage.
As an investment banker on Wall St for an entire career (I was a senior banker in what was called a "creative shop"), I saw instruments created (including derivatives) that helped borrowers and those seeking investment capital more precisely and more accurately and, yes, less expensively, define their means of raising capital.
I saw instruments created that either attracted new lenders or investors to previous inactive markets because of their precision in meeting the needs of such lenders and investors.
Also, I have seen instruments created that let farmers and corporations hedge against certain kinds of risk that had plagued their types of operations since the beginning of time.
I have seen specialized funds created that made capital available to certain difficult to understand kinds of companies/operations/ventures and made pure specialty investment opportunities available to investors with specific and specialized knowledge of very narrow fields of endeavor.
I have seen venture capital endeavors come to life because at long last an instrument was created that helped investors overcome their aversion to certain elements of risk (or bypass that risk altogether).
Though I have been retired for quite a while now, I am certain that some of the recent derivatives were monumentally wasteful and ineffective.
For the most part, I developed products for institutional and high net worth investors in the private placement market and our rule of thumb was to always make sure the investor understands the product. That said, to any investor, whether individual or institutional, the same old rule applies..."caveat emptor!"
IMO, the biggest problem is over-leverage. Dubya allowed Wall Street firms to employ leverage of 40-1, where a paper loss of 2.5% wipes out your equity, even if only temporarily.
What say you about the potential repeal of Glass-Steagall?
In accounting, product design, shipping, material handling, farming, fishing, manufacturing, etc., nothing you see today would be possible without computers.
To people who have spent their careers analyzing business operations, the computer is on a par with the internal combustion and/or diesel engine in its impact on productivity.
For what its worth, I majored in what might be called mathematical modeling (also known as operations research or econometrics) in grad school in the mid 1970's and I happened to be right on the cusp of the introduction of computers for that activity.
Prior to computers, our models were huge and unwieldy and probably prone to much human error. However much they were prone to error, they were used in every thing from military operations, to product design, to manufacturing, to medicine, to entire economies.
Needless to say, when the computer came along, my chosen field of study made a great leap forward. All of a sudden, we could design systems which were only limited by our imagination and grasp of mathematics. And we could virtually eliminate human error by building in checks and balances and parallel systems.
All this said, I would agree with you that the operative word is "measurement" when it comes to understanding the impact of computers on productivity. Volcker is an old fashioned economist and his tools for measurement are probably quite outdated. But that doesn't mean that such impact doesn't exist or is not measurable using the right tools.
My father-in-law was the CEO of a large bank and was the typical old-fashioned, risk averse kind of lender. Replacing that kind of guy with an investment banker and injecting into a commercial bank an aggressive investment banking kind of culture would (and did) lead to trouble.
BTW, I was long gone from the business by the time the Act was repealed, but the banks had been chipping away at it since as far back as I can remember.
I have seen the wise guys on Wall Street blow up themselves and this economy and get on the welfare line with taxpayers and the Fed bailing out these turds. The Fed now has on its books most of the toxic assets these turds created. Same thing happened in some European nations
Sure you saw some good things and good ways to hedge against risk
Sure you described simple futures contracts which I have no problem with
But blinders on, you have ignored how much damage Wall Street has done. It it were up to me I would ban most derivatives. The complainers can go trade them in Dubai or London for all I care
Or I would mandate that all derivatives are traded publicly on a transparent market I can see on the internet like the futures markets
This Wall Street mischief is same as the concocted global warming and the scientists behind it. I don’t trust them and I don’t trust Wall Street. They both cook up a trashy product that requires billions and trillions in spending and wealth transfers and abilouts
Like Volcker said— We got along just fine without swaps and derivatives
And yes, there are scummy guys and gals on Wall St, just as there are on Main St.
My point was this... ultimately, it is up to the buyers of bad investments to prevent con-artist anywhere and everywhere from scamming them.
Banks and other presumably sophisticated investors bought these derivatives and I place the fault squarely on their shoulders. These products were not sold to individual investors...there are laws to prevent that or at least to require enough transparency that the man on the street can understand what he is buying.
But I don't recommend enacting laws that prohibit the development of financial product because, for the most part, it is difficult for legislators and regulators to write rules in such a way that good ideas are permitted yet bad ones are squelched.
There is always someone just around the corner attempting to sell a pig in a poke or some good swamp land, isn't it socialistic for the government to take away a buyer's right to make his own decision.
And knowing how crooked legislators are (they are the very worst con-men...even worse than those on Wall St), how could we ever expect them to enact laws that don't benefit their friends and hurt their enemies (in the financial biz). Goldman would love to help out in just such an endeavor.
Whatever..... I disagree. Thanks for your thinking on it. The global warming scientists also think they put out a good product. AlGore thinks he is a business genius and innovator
I am, in many ways, ashamed of my career choice even though I knew a lot of regular, hard-working guys and gals who never made a hundred mill a year (back in my day, we did very well, but nothing like today).
Also, my opinion is only an opinion and a dated one at that.
I will certainly take your POV under consideration and adjust my outlook accordingly.
Just on the news today and yesterday was that people have a very low opinion of Wall Street. Worse than for politicians. You were an honorable person there and so were others you knew. But I have to separate that from the entire “industry” and what they did with their hallowed swaps and derivatives. These “innovative instruments” were supposed to “hedge against risk” but instead they blew up the financial system . And then you all got bailed out for doing that. And are getting new bonuses after the fact
So I agree with Paul Volcker completely
The old way was better....
Arcane OTC derivatives should be outlawed or traded transparently and regulated. As of now they are traded in the dark same as before. You mentioned futures before. Those are publicly traded out in the open unlike most derivatives
I blame Wall Street 60%. They made the real estate bubble 20x worse by securitizing cruddy mortgages then betting on them with swaps
I blame the Federal Reserve a lot for its low interest rate policy
Congress gets blame for repealing Glass Steagel and passing the Commodity Futures Modernization Act of 2000
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