Discussion with Paul Volcker; video

[TJ_98370]

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Paul Adolph Volcker (born September 5, 1927 in Cape May, New Jersey), is an American economist. He is best known as Chairman of the Federal Reserve ("The Fed") under United States Presidents Jimmy Carter and Ronald Reagan (from August 1979 to August 1987). He is today an economic advisor to Democratic presidential candidate Barack Obama.
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From Calculated Risk -
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My favorite quote from the interview -
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"....We need fewer financial engineers and more electrical engineers, chemical engineers, and civil engineers to take care of our infrastructure. We put too much talent into false castles in the financial world...."
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[Alan]

[Charles Dean]

I have a feeling financial people won't be making so much money anymore now that they've stolen all of the country's wealth.

[rose-colored-coolaid]

[TJ_98370]

I think it's a given that more regulation will be imposed. I think the days of unrestricted "gaming" of the system are coming to an end, at least until another loophole is discovered / made.
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Maybe it's just me, but I have always been bothered by the fact that a lot of American talent and brainpower seems to have been misdirected into the financial industry. The ranks of hedge fund managers, quantitative analysis people, investment bankers, etc. are filled with brilliant people, but what is it that they actually do? Maybe I am being over-simplistic, but it appears to me that these people specialize in the transfer of wealth (a lot of it to themselves, I might add) without actually producing anything. Aren't these people parasitic to the overall economy? Aren't these people a lot like the gambler who is always attempting to develop a "system" to beat the odds?
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[Alan]

[SeattleMoose]

"Aren't these people parasitic to the overall economy? "

The answer......YES THEY ARE PARASITES!!!

From Yahoo News...."The pledges by six countries that use the euro and Britain helped soothe stock markets, along with a promise by top central banks to provide unlimited short term dollar credits."

Wow, both the EU and American parasites are trying just about everything to try and keep their large tower of rotting corruption and greed from toppling over. Latest announcements include promises of "unlimited amounts" to try and keep the crash at bay.

It won't work. The parasites let their own greed turn them from simply parasites into predators, and they now are having to deal with the consequences of their own excesses.

[TJ_98370]

Alan,
Your resource allocation explanation would be believable, except it falls apart upon examination of creations like CDO's, or CDS's. The function of these financial instruments is nothing more than to spread / direct known risks away from the originators thru layers of complexity that apparently even the originators do not fully understand. That's not efficient allocation, that's greed attempting to escape the unpleasant reality of risk.

[rose-colored-coolaid]

Alan's response is a good one, but it fails to mention that like a living organism, a financial organism needs to be balanced. People need hearts, but if you made the heart 60% of their body mass it would kill them. These guys are the same kind of problem. We need some really smart financial engineers, but not at the exclusion of all else.

[jon]

[Alan]

[explorer]

...Market regulation to promote stability would be a good and useful thing. I don't think we, as a society, know enough to do that. The financial system is incredibly complex and stability in complex systems is difficult. One might argue that the derivative products exploit flaws in current regulation. Any new regulation might have similar flaws. How does one know? I don't think system analysis science is advanced enough to build a failsafe regulation structure.

I dunno. Wasn't it the Depression-era Glass-Stengal act that kept a lid on this kind of stuff, until it was repealed in the late 90's. Then it was only a few short years before all hell broke loose.

The credit bubble that the CDO's and SIV's took a symbiotic relationship with, tells me those smart people KNEW this would happen eventually, but the trick was to get it while it lasted, because NONE of them would be required to pay anything back into the system they corrupted.

You don't need to be that smart, just observant of the street economics and recognize what you are seeing is reality, not what you are being told is reality.

[Alan]

[rose-colored-coolaid]

[TJ_98370]

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Bill Clinton signed into law the bill that repealed the Glass-Steagull Act. This is what he said about why he signed the bill. It supports what RCC is saying --
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......I thought at the time that it might lead to more stable investments and a reduced pressure on Wall Street to produce quarterly profits that were always bigger than the previous quarter.....
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.....Phil Gramm and I disagreed on a lot of things, but he can't possibly be wrong about everything. On the Glass-Steagall thing, like I said, if you could demonstrate to me that it was a mistake, I'd be glad to look at the evidence. But I can't blame [the Republicans]. This wasn't something they forced me into. I really believed that given the level of oversight of banks and their ability to have more patient capital, if you made it possible for [commercial banks] to go into the investment banking business as Continental European investment banks could always do, that it might give us a more stable source of long-term investment.....
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It is looking like maybe Mr. Buffet was right?
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....I view derivatives as time bombs, both for the parties that deal in them and the economic system....
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..... A sensitivity analysis incorporating market information and rating migrations data reveals that the behaviour of CDO tranche ratings can differ markedly from that of corporate ratings. In addition, tranching is found to have an important impact on the probability of large losses. This highlights how investors who narrowly focus on ratings and draw direct parallels with corporate exposures can seriously misjudge the value-at-risk of CDOs.....
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Translation – The risk associated with CDO's was misrepresented. "Financial engineering" work in progress and on full display.....
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