Volcker: Fed Needs to Start Draining Liquidity

How many people listen to former Federal Reserve Chairman Paul Volcker these days? Sadly, the answer to that question is probably "far too few." However, that doesn't stop him from speaking his mind as reported by Reuters Thursday.

The enormous amounts of liquidity pumped into the U.S. financial system by the Federal Reserve are not inflationary "at the moment" but will become so at some point, Paul Volcker, the former Fed chairman and a White House adviser, said on Thursday.
Volcker, now an economic adviser to President Barack Obama, said it was difficult, but necessary, to start draining the billions of dollars in liquidity even while unemployment rates remained high as the U.S. battles out of recession.
"You have to act against what seems like common sense. If you wait, it's too late," Volcker said while answering questions after a speech on financial markets at Harvard University's Kennedy School of Government.
Financial markets have not yet fully healed, he said, and the economy remains plagued by structural imbalances that threaten to prevent a sustainable recovery taking hold from the deep recession.
"We have to regain our ability to produce goods. Moving money around does not necessarily provide dinner on the table," Volcker said. "You can't run an economy where the financial sector is making 40% of the profits."

It's too bad that more powerful voices (and personalities) in the Obama White House have caused Volcker to be largely ignored in recent months.

Comments

[CautiousInv...:]

Sadly he is viewed as an economic dinosaur, a dated iconic figure who is not current in "modern economics" where trade balances really don't matter, budget deficits really don't matter and a depreciating dollar really doesn't matter. We can borrow unabatedly and as long as we have surplus labor, unused capacity and output gaps, we can pursue expansionary fiscal and monetary policies indefinitely.

Oct 16 01:59 PM

[ron_paulite:]

TPTB is bent on monetarizing debt, printing money, zero interest rate, growth at all cost and by all means, devaluing the dollar, easy and quick fixes, enriching themselves.... and then World War III, in which they hope they will win and start all over as no. 1 again.

Volcker is one of the few voices of reason in Capitol hill. Ron Paul is another.

Oct 16 02:33 PM

[The Geoffster:]

I, however, place economy among the first and most important republican virtues, and public debt as the greatest of the dangers to be feared.
- Thomas Jefferson

Oct 16 02:38 PM

[whack'em:]

unfortunate, given his track record vis a vie the clowns who think they can ignore basic economic facts that we are stuck with on wall st and in the treasury dept. any-one can turn on the printing presses; turning them off is where experience counts. i don't think the world is going to be lining up to try our newest scam any time soon..we need to get back to producing solid stuff- cars, steel, and all those other thing one can actually hold...

Oct 16 02:39 PM

[seenoevil:]

Lets give the big V a hand for calling a it as it is,, mister B our current fed is still waiting for the next Big D,, heaven help us....

Oct 16 02:59 PM

[iceberg17:]

it is quite a party, line for a few more drinks at the punchbowl...when this party is going to be over it is going to be the mother of all hangovers!!!!

Oct 16 03:35 PM

[ryanclarke:]

The U.S. economy outside of the world of Wall Street will not work with oil at $100+ a drum. I think 2008 proved as such. Chairman Mao, I mean Chairman Bernake, would like to state to OPEC that because the U.S. is consuming less oil (down from 21 MBPD to 19 MBPD) the price of oil should come down "naturally." What Bernake refuses to accept is the dollar is at the same inflection point as it was in the fall of 2007. In my humble opinion the only way to get the dollar turned around is to raise short term interest rates ... something that the Fed refuses to do. But to turn around a currency with monetary policy takes some time ... so by next March 2010 if Bernake doesn't "get with the Volcker program" the U.S. will be locked in ... in the sense the dollar will continue to decline to new lows and oil will continue to rise in price REGARDLESS OF REDUCED U.S. DEMAND !!!!!!!!!!! Hopefully, unlike the fall of 2007, big baby Bernake will swallow the little pill Dr. Volcker has been recommending for the past six months. The Fed chief's job should be so simple a retard can do it ... either raise or lower short term interest rates in order to induce monetary policy. The Fed chief should not be running a bank and buying balony from little banks and attempting to induce monetary policy by attempting to buy treasury bonds at the long end ... because the Fed doesn't have enough money to do as such... without running to Congress and begging for more funding every six months. Sometimes, the only way to save the patient is to stop the heart and do the transplant. Everything Bernake has done to date is to save the patient with the existing heart ... when a transplant is required ... that is, the banks need to be wiped clean, before the U.S. completely shuts down due to overwhelming energy costs.

Oct 16 03:53 PM

[debtacid:]

The worst thing about this mess is that the banking oligarchy won't ALLOW us to take even the smallest prudent steps to recover. Seems we will never escape the clutches of these evil New York bankers. We should wall off the whole city and send in Snake Plisskin to kick ass...

Oct 16 04:48 PM

[Dave Wrixon:]

Yep, basically they hired him, so that he is easier to ignore.

Pretty sad really. For America, that is.

Oct 16 07:47 PM

[herculos:]

With all respect for Mr. Volcker I think it's a little bit too early for what has been proposed . The stability of the dollar at this level will enhance our exports to a level which will allow some restraint on the FED's liquidity being supported by imported money ."BUY AMERICAN"

Oct 16 10:11 PM

[Smarty_Pants:]

"send in Snake Plisskin to kick ass... " - debtacid

I heard he was dead.

Oct 16 10:46 PM

[flow5:]

"""Sadly, the answer to that question is probably "far too few.""""
Tim Iacono, tell me exactly why it is sad??? If you have examined the data for the period Volcker held his office you would have buried him. I was trading the CBOT & CME futures at that time. I know. He is ignorant and arrogant:

In 1980, Paul Volcker, Past chairman of the Board of Governors of the Federal Reserve System, appeared before the House Domestic Monetary Policy Subcommittee. In response to a question as to why the Fed had supplied an excessive volume of legal reserves to the member banks in the third quarter 1980 (annual rate of increase 13.2%), Volcker's defense was that there are two types of legal reserves: 1) borrowed (reserves obtained by the banks through the Federal Reserve Bank discount windows), and 2) non-borrowed (reserves supplied the banking system consequent to open market purchases). He advised the congressmen to watch the non-borrowed reserves -- "Watch what we do on our own initiative." The Chairman further added --- "Relatively large borrowing (by the banks from the Fed) exerts a lot of restraint."

This is of course, economic nonsense. One dollar of borrowed reserves provides the same legal-economic base for the expansion of money as one dollar of non-borrowed reserves. The fact that advances had to be repaid in 15 days was immaterial. A new advance can be obtained, or the borrowing bank replaced by other borrowing banks. The importance of controlling borrowed reserves was indicated by the fact that at times nearly 10% of all legal reserves were borrowed.

Oct 17 12:41 PM

[flow5:]

On October 6, 1979 Paul Volcker, Chairman, Board of Governors of the Federal Reserve e System promised that the Fed was going to mend its ways. Hereafter the Fed would deemphasize the control of the federal funds rate and concentrate on holding the monetary aggregates in check. We were advised to “watch the money supply”.

For approximately the first four months following this pronouncement the money supply increased at an annualized rate of 20 percent... Up from the 8 percent increase in the prior five months... Obviously there had been no significant change in monetary policy. Why? Apparently the Manager of the Open Market Account who operated from an office in the Federal Reserve Bank of New York and who is in charge of all open market purchases and sales for all 12 Federal Reserve banks decided there should be no change in monetary policy.

Note: the actual monetary policy of the Fed during the 1980 was only nebulously related to the official policies of the Federal Open market committee (FOMC) as published in the Federal Reserve Bulletin. Open market purchases were of such a magnitude in this period member bank legal reserves expanded at an annualized rate of 20 percent.

The excessive increase in the money supply made possible by this growth in reserves was accompanied by a continuing raise in the transactions velocity (rate of turnover) of money at an annualized rate of 24.9 percent. Consequently monetary flows (aggregate monetary purchasing power) shot up to annual rate of 33.3 percent –an excessively easy money policy in view of the virtual stagnation of real GDP growth during this period.

During the next 3 months or to the end of April 1980 the fed slammed on the brakes. Member bank legal reserves decreased at an annualized rate of 20 percent, and money flows declined at an annual rate of 16.8 percent as a consequence of a small drop in transactions velocity.

Unfortunately the Fed reversed its tight money policy toward the end of April, and went on a monetary binge. For the six month period ending in December, member bank legal reserves were inflated at a 15 PERCENT ANNUALIZED RATE, and the MONEY SUPPLY EXPANDED AT AN ANNUALIZED RATE OF 20 PERCENT AND MONETARY FLOWS (MVt) SURGED AT AN ESTIMATED ANNUAL RATE OF 29 PERCENT.

fyi - i had no losing trades in the markets i traded - bonds & gold

Oct 17 12:47 PM