In his fascinating speech given yesterday former Federal Reserve Chairman, Paul Volcker, gives his analysis and reactions on how the US and the world's economies have weakened "at a shocking rate" over the last year. ( See below ) What is most interesting about his speech is how he explicitly avoids what he and the President's team will do about the crisis in the coming days. There are strong hints that the banking system is going to be organised and regulated in manner far different from before. He is probably working with most of the world's governments to put together international regulations on banks to take account of our global business world: something the previous US administration did not have the wit nor relationships to do. It is increasingly apparent that the manner in which the world's banks and financial institutions were regulated had more in common with the Victorian age than with our own. Volcker thinks that he can save "capitalism" by doing this. But by his own admission if he fails, so too, will the capitalist world as we know it.
It was Paul Volcker who saved the US economy and its dollar in the early 80s with high interest rates. The cost of this was the destruction of much of the US's industrial base. At 81 whether he and his economic team can salvage the capitalist economic system remains to be seen. Due to globalisation the economic problems this time are far greater and higher interest rates would damage the US and much of the world's economies. Masses of jobless, homeless, starving people would demand a revolution and a different economic system.
In an interview with Charlie Rose last September Volcker offered a vignette about FDR Roosevelt closing the banks for several days to sort out the good ones from the bad. Roosevelt gave a fire-side chat on the radio to reassure Americans that the new banks would be safe and when the banks opened after four days the US public believed him. They trusted the banks that reopened because of the President's crediblity. Volcker laughed at this because Roosevelt knew that there was no way that the banks could have been thoroughly checked out in that time. It was a piece of theatre intended to inspire public confidence, something that most bankers and politicians are unable to emulate today. Roosevelt inspired confidence and that made the difference. Of course, the US economy and others around the world continued to suffer the effects of the Depression because their economies were too badly led and damaged before Roosevelt's arrival in office. Banks are the backbone of capitalism and if Volcker and Obama's economic team can restore confidence in banks the rest will fall into place.
By the way, the other thing that FDR Roosevelt did that should have been done before he entered office was to devalue the dollar and increase the price of gold. His predecessor and his advisers did not understand the damage that a strong dollar would inflict on the US economy. Somehow I don't think Volcker and Obama will repeat this mistake.