Source: Bloomberg
By Rainer Buergin and Philipp Encz
March 8 (Bloomberg) — White House adviser Paul Volcker said it’s too soon for U.S. policy makers to withdraw the stimulus measures and interest-rate cuts used to fight the worst slump since the Great Depression.
“This is not the time to take aggressive tightening action, either fiscally or monetary-wise,” said Volcker in an interview in Berlin March 6, pointing to “high” unemployment. “So I think we have to, as best as we can, maintain the expectation that it will be taken care of in a timely way.”
The Federal Reserve and the Treasury are trying to withdraw the emergency measures introduced during the financial crisis without causing a relapse in the economy. Fed Chairman Ben S. Bernanke said Feb. 24 the U.S. is in a “nascent” recovery that still requires keeping interest rates near zero “for an extended period” to spur demand once stimulus wanes.
At the same time, the Treasury’s resources are under strain from the loss of 8.4 million jobs since December 2007, stimulus spending, wars in Afghanistan and Iraq and health care programs. The Obama administration predicts the budget deficit will swell to a record $1.6 trillion in the fiscal year ending Sept. 30.
Volcker, whose recommendations inspired the restrictions on bank trading that President Barack Obamasent to Congress last week, said U.S. lawmakers must now prove they can pass the “comprehensive” legislation needed to prevent another financial crisis.
Test
“That is the test,” said Volcker. “Congress has not been very good at passing any comprehensive legislation in various areas.” Banking rules “shouldn’t be a matter of partisan dispute. But everything seems to be infected by partisan disputes in the U.S. now.”
The so-called Volcker Rule would ban banks from hazardous trading and imposes limits on how large they can grow. Obama’s plan faces resistance in Congress. Lawmakers including Senate Banking Committee Chairman Christopher Dodd have called the plan a political ploy and said it could complicate efforts to overhaul rules governing financial companies.
“There is a lot of lobbying out there on the other side,” Volcker said. Volcker, who said he hasn’t seen the “precise language” of Obama’s legislation, said he doesn’t believe the proposal has been “watered down.”
Asked whether responsibility for consumer protection should be given to the Fed, Volcker said it’s “not really central to the banking supervision question.”
“It is a very important question politically and some people think it’s the most important single element, but I think it’s not an element that’s crucial in terms of my concerns,” he said.
Ingenuity
The former Fed chairman said regulators will have to clearly define proprietary trading when supervising banks.
“The legislation is quite clear that hedge funds and private-equity funds are prohibited for banks and so is proprietary trading, but then you have to interpret,” he said. “Banks are ingenious in saying: ‘Well, this isn’t exactly a hedge fund.’ So the supervisor’s going to have to say: ‘No, sorry, whatever you call it, we call it a hedge fund.’”
Volcker was in the German capital to give a speech to the American Academy in Berlin, a trans-Atlantic research institute. In his address, he pointed to the “abuse” of derivatives to massage Greece’s budget deficit as a reason to tighten regulation of the securities.
To contact the reporter on this story: Rainer Buergin in Berlin at rbuergin1@bloomberg.net