1. The following conversation is based on the recollection of Paul Volcker.
2. See Washington Post, January 9, 1985, p. A1, for the announcement of the job switch.
3. On August 6, 1979, the day before Volcker took office, the mark closed at 1.8295 marks per dollar and the yen closed at 217.15 yen per dollar. On September 20, 1985, the last trading day before the Plaza Agreement, the mark was at 2.8475, a 56 percent increase in the value of the dollar, and the yen was at 241, an increase in the dollar of 11 percent.
4. PIPAV.
5. Transcript, Federal Open Market Committee Meeting, October 1, 1985, p. 25.
6. On September 20, 1985, the Friday before the Plaza Agreement, the yen closed at 241 yen per dollar and the mark closed at 2.8475 marks per dollar. On February 3, 1986, the yen closed at 191.6 yen per dollar, a 20 percent decline in the value of the dollar, and the mark closed at 2.4 marks per dollar, a 15.7 percent drop in the value of the dollar. According to Volcker, the expected depreciation at the Plaza meeting was about 10–12 percent. See Paul Volcker and Toyoo Gyohten, Changing Fortunes: The World’s Money and the Threat to American Leadership (New York: Times Books, 1992), p. 254.
7. The FOMC consists of the seven-member board plus a rotating group of five presidents of the regional Federal Reserve banks, with the exception of the president of the New York Fed, who is a permanent member of the FOMC.
8. See New York Times, October 11, 1985, p. D1.
9. The phrase “Gang of Four” as applied to the Reagan appointees to the Federal Reserve Board appears in a headline in the Washington Post, January 30, 1986, p. A25.
10. See New York Times, October 11, 1985, p. D1.
11. See Minutes of the Board of Governors of Federal Reserve System, January 27, 1986, p. 5: “At several previous meetings, most recently on January 21, 1986, the Board had considered but taken no action on requests by some Reserve Banks to lower the discount rate.” The last discount rate change was on May 20, 1985, a decline from 8.0 percent to 7.5.
12. This quote and the remaining quotes in this conversation are based on the recollection of Paul Volcker and on the reports in the New York Times, March 24, 1986, p. A1, and the Washington Post, March 17, 1986, p. A11. The Minutes of the Board of Governors of Federal Reserve System, February 24, 1986, pp. 2–3, gives a general description.
13. Washington Post, March 19, 1986, p. A1.
14. PIPAV.
15. Washington Post, February 20, 1986, p. A15.
16. Ibid.
17. The following conversation is based on the recollection of Paul Volcker.
18. PIPAV.
19. See Minutes of the Board of Governors of Federal Reserve System, February 24, 1986, p. 6, for a description of the afternoon meeting. The face-saving on all sides is reflected in the following quote: “In view of the improved prospects for coordinated actions, a consensus was recorded to reconsider the decision reached earlier today to reduce the discount rate.”
20. Washington Post, March 8, 1986, p. A1.
21. Ibid.
22. Ibid.
23. Washington Post, March 17, 1986, p. A11.
24. Washington Post, March 22, 1986, p. A1.
25. Ibid.
26. See the twelfth annual survey of “Who Runs America,” U.S. News & World Report, May 20, 1985, p. 54.
27. PIPAV. Also see Bob Woodward, Maestro: Greenspan’s Fed and the American Boom (New York: Simon & Schuster, 2000), p. 19.
28. Washington Post, March 27, 1986, p. A1.
29. Letter dated August 6, 1979, Personal Letters from 1979, Papers of Paul Volcker, Federal Reserve Bank of New York Archives, Box 95714.
30. Response to Carlock, dated August 16, 1979, Personal Letters from 1979, Papers of Paul Volcker, Federal Reserve Bank of New York Archives, Box 95714.
31. Letter dated June 19, 1983, Personal Papers of Paul Volcker.
32. Newsweek, February 24, 1986, p. 46.
33. Ibid.
34. PIPAV.
35. New York Times, March 31, 1987, p. B6.
36. PIPAV.
37. Washington Post, February 28, 1987, p. A21.
38. Washington Post, March 14, 1987, p. A21.
39. See “Bank Curb Eased in Volcker Defeat,” New York Times, May 1, 1987, p. D1.
40. See Minutes of the Federal Reserve Board, “Citicorp; J.P. Morgan & Co.; Bankers Trust New York Corporation, all of New York, New York—Applications to underwrite and deal in certain securities,” April 29, 1987.
41. New York Times, May 1, 1987, p. D1.
42. Ibid.
43. Wall Street Journal, May 4, 1987, p. 66.
44. The following dialogue is based on the recollection of Paul Volcker and on the Wall Street Journal, June 3, 1987, p. 20, and the Washington Post, June 3, 1987, p. A1 continued. Reagan’s diary entry (see the next note) confirms Volcker’s recollection that he chose not to be reappointed. Bob Woodward in Maestro, p. 23, claims that Volcker asked Baker, “If I were [interested] would the President reappoint me?” Woodward also claims that Volcker then suggested (without quotes), let me think about it. The public record fails to confirm Woodward’s version.
45. See the entry for May 27, 1987, in Douglas Brinkley, ed., The Reagan Diaries, vol. 2 (New York: HarperCollins, 2009), p. 728.
46. Paul Laxalt, Reagan’s best friend in the U.S. Senate, as quoted in the Washington Post, March 30, 1982, p. A1.
47. See Woodward, Maestro, p. 21.
48. Ibid., p. 19.
49. The sale of arms to Iran in violation of a U.S. embargo was exposed in November 1986. President Reagan appointed a commission chaired by Senator John Tower to investigate. The Tower Commission called the president to testify and later exonerated him from direct knowledge but criticized him for not properly monitoring his subordinates.
50. Wall Street Journal, June 3, 1987, p. 20.
51. See New York Times, June 2, 1987, p. D1, for this precise quote and the article in the Wall Street Journal, June 1, 1987, p. 3, entitled, “Fed’s Volcker Is Likely to Be Reappointed If He Wants, White House Aide Indicates.”
52. New York Times, June 3, 1987, p. D26.
53. Washington Post, June 3, 1987, p. A1.
54. Ibid. Also see Ecclesiastes 3:1 “For everything there is an appointed time.”
55. Ibid.
56. Wall Street Journal, June 3, 1987, p. 20.
57. The closing prices on June 2, 1987, versus June 1, 1987, reflect the market’s assessment of the news during the day. The value of the dollar fell from 1.834 marks to 1.804 marks, a decline of 1.6 percent, which is statistically significant compared with a daily average standard deviation of returns equal to 0.74 percent. Gold rose from $443 to $455, an increase of 2.7 percent, which is significant when compared with a daily standard deviation of returns equal to 1.25 percent. The daily standard deviations are measured from January through May of 1987.
58. See “Markets Decline After Volcker Steps Down,” Washington Post, June 3, 1987, p. G1 continued.
59. Letter dated June 4, 1987, Personal Papers of Paul Volcker.
60. See “Hill Reaction to Greenspan Is Varied,” Washington Post, June 3, 1987, p. G1 continued.
61. Wall Street Journal, June 3, 1987, p. 20.
62. Washington Post, June 3, 1987, p. G1 continued.
63. Wall Street Journal, June 3, 1987, p. 20.
64. The increase in the ten-year bond rate from 8.45 percent to 8.72 percent is a jump of 3.2 percent and is statistically significant compared with a daily average standard deviation of yield changes (measured from January through May of 1987) of 0.97 percent.
1. Seven black binders containing each letter and response in a separate cellophane wrapping are available in the Personal Papers of Paul Volcker.
2. The letter is dated June 6, 1987, Personal Papers of Paul Volcker.
3. The letter is dated June 10, 1987, Personal Papers of Paul Volcker.
4. The letter is dated June 2, 1987, Personal Papers of Paul Volcker.
5. The letter is dated August 1, 1987, Personal Papers of Paul Volcker.
6. The letter is dated June 5, 1987, Personal Papers of Paul Volcker.
7. The letter is dated June 3, 1987, Personal Papers of Paul Volcker.
8. Wall Street Journal, June 3, 1987, p. 1 continued.
9. “The Triumph of Central Banking?” 1990 Per Jacobsson Lecture, Washington, DC, September 23, 1990.
10. Both talks were given at the joint meeting of the World Bank and International Monetary Fund.
11. “The Triumph of Central Banking?” 1990 Per Jacobsson Lecture, Washington, DC, September 23, 1990, p. 3.
12. Morse said after Volcker spoke, “The great deflation of the 1930s … was not very well handled, and … the politicians and the commentators were able to put much of the blame onto the central banks … Now, if in the 1980s there was a successful disinflation … and if at the same time the reputation of central banks were enhanced … then no one takes more credit for that than Paul Volcker.” See “The Triumph of Central Banking?,” p. 18.
13. Ibid., p. 14.
14. Ibid.
15. PIPAV.
16. Interview with Milton Friedman, October 1, 2000, at www.pbs.org/wgbh/commandingheights/shared/minitext/int_miltonfriedman.html.
17. Paul Volcker and Toyoo Gyohten, Changing Fortunes: The World’s Money and the Threat to American Leadership (New York: Times Books, 1992), p. 175.
18. Newsweek, February 24, 1986, p. 46.
19. Alan Blinder, “Panel Discussion I: What Have We Learned Since October 1979?” in Reflections on Monetary Policy 25 Years After October 1979, Federal Reserve Bank of St. Louis 87, no. 2, part 2 (March/April 2005): 283.
20. Blinder cites Otto Eckstein, a leading Keynesian econometrician (Otto Eckstein, Core Inflation [Englewood Cliffs, NJ: Prentice-Hall, 1981]), as an example of someone predicting an especially poor trade-off—which Blinder implies was not representative of the mainstream. But Arthur Okun, in “Efficient Disinflationary Policies,” American Economic Review 68, no. 2 (May 1978), surveyed the existing econometric evidence that provides a range of estimates at that time. According to Marvin Goodfriend and Robert King in “The Incredible Volcker Disinflation,” Journal of Monetary Economics 52, no. 5 (July 2005): 982–83, Okun’s article implies that Volcker’s “6 percentage point reduction in inflation … would have led to a modern Great Contraction,” which it did not. None of this is meant to imply that the increase in unemployment was trivial. It was not. It implies only that Volcker’s disinflation was less costly than professional economists expected.
21. Volcker defined stable prices as “a situation in which expectations of generally rising (or falling) prices over a considerable period are not a pervasive influence on economic and financial behavior.” (See Paul Volcker, “We Can Survive Prosperity,” remarks at the Joint Meeting of the American Economic Association—American Finance Association, San Francisco, CA, December 28, 1983, p. 5.) That definition was later echoed by Alan Greenspan: “Price stability is that state in which expected changes in the general price level do not effectively alter business or household decisions” (see Transcript, Federal Open Market Committee Meeting, July 3, 1996, p. 51).
22. See Goodfriend and King, “The Incredible Volcker Disinflation,” esp. pp. 1008–12.
23. See Milton Friedman, “How to Give Monetarism a Bad Name,” in Essays Prepared for the Joint Economic Committee, Congress of the United States, June 27, 1985, Washington, DC, pp. 51–61; and see Allan Meltzer in Administration’s Fiscal Year 1983 Budget Proposal: Hearings Before the Senate Committee on Finance, 97th Congress, 2nd Sess., February 23, 1982, Government Printing Office, Washington, DC, 1982, p. 180.
24. New York Times, December 31, 1983, p. 29.
25. Newsweek, February 24, 1986, p. 46.
26. For evidence on the response of monetary policy to inflation during the Volcker-Greenspan period compared with earlier, see Richard Clarida, Jordi Gali, and Mark Gertler, “Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory,” Quarterly Journal of Economics 115, no. 1 (February 2000): 147–80. They summarize (p. 148): “During the Volcker-Greenspan era the Federal Reserve adopted a proactive stance toward controlling inflation: it systematically raised real as well as nominal short term interest rates in response to higher expected inflation.”
27. See chairman’s remarks in Reflections on Monetary Policy 25 Years After October 1979, Federal Reserve Bank of St. Louis 87, no. 2, part 2 (March/April 2005): 138.
28. The letter is dated August 28, 1984, Personal Papers of Paul Volcker.
29. See chapter 12.
30. Alan Greenspan, The Age of Turbulence (New York: Penguin, 2007), p. 35.
31. Politics prevented, in Burns’s words, “the Federal Reserve … [from] frustrating the will of Congress to which it was responsible—a Congress that was intent on providing additional services to the electorate.” See Arthur Burns, “The Anguish of Central Banking,” 1979 Per Jacobsson Lecture, Belgrade, Yugoslavia, September 30, 1979, p. 16.
32. New York Times, August 28, 1981, p. D2.
33. The Federal Reserve’s First Monetary Policy Report for 1984: Hearings Before the Senate Committee on Banking, Housing and Urban Affairs, 98th Congress, 2nd Sess., February 8, 1984, p. 108.
34. See New York Times, August 12, 1983, p. D2.
35. The Nomination of Alan Greenspan: Hearings Before the Senate Committee on Banking, Housing and Urban Affairs, 100th Congress, 1st Sess., July 21, 1987, pp. 25 and 27.
36. Rudolph G. Penner and C. Eugene Steuerle (“Budget Rules,” National Tax Journal 57, no. 3 [September 2004]: 549) describe the history of the budget control rules legislated in the Budget Enforcement Act of 1990 as follows: “When it became apparent that GRH [Gramm-Rudman-Hollings] was not working, President George H. W. Bush began difficult, bipartisan negotiations with the Democratically-controlled Congress. The result was a significant deficit reduction package … The rules embodied in the agreement, which were adapted and extended under President Clinton’s 1993 budget agreement, worked extremely well through 1997.” The 1998 surplus is described as a surprise on page 550 of the same article.
37. Bob Woodward, Maestro: Greenspan’s Fed and the American Boom (New York: Simon & Schuster, 2000), p. 221.
38. A nice survey of the causes of the Great Moderation, and the starting date, is in Peter M. Summers, “What Caused the Great Moderation? Some Cross-Country Evidence,” Federal Reserve Bank of Kansas City Economic Review (3rd quarter 2005): 5–32. Summers mentions three standard explanations (p. 11): “Better monetary policy, structural changes in inventory management, and good luck.” Volcker’s chairmanship of the Federal Reserve Board begins the regime of better monetary policy that continues through the Greenspan period (see Clarida, Gali, and Gertler, “Monetary Policy Rules and Macroeconomic Stability”). Ben Bernanke, in a talk entitled “The Great Moderation” before the Meetings of the Eastern Economic Association on February 20, 2004, suggests that the inventory improvement explanation may in fact be related to improved monetary policy (p. 15). “High and unstable inflation increases the variability of relative prices and real interest rates, for example, distorting decisions regarding consumption, capital investment, and inventory investment, among others.”
1. The crisis is sometimes called the subprime mortgage crisis because the mortgage securities that were the source of the initial problem were below the top credit ratings. The label “World Financial Crisis” appears in The Squam Lake Report (Princeton, NJ: Princeton University Press, 2010), a brief book coauthored by fifteen financial economists offering detailed recommendations to guide financial reform. For a discussion of the development of the crisis, see Stephen Cecchetti, “Symposium: Early Phases of the Credit Crunch,” Journal of Economic Perspectives 23 (Winter 2009): 51–75. An exhaustive description of the origins of the crisis is in The Financial Crisis Inquiry Report, submitted by the Financial Crisis Inquiry Commission Pursuant to Public Law 111-21, January 2011, available at U.S. Government Printing Office, Washington, DC 20402.
2. See “Radical Shift for Goldman and Morgan,” New York Times, September 22, 2008, p. A1.
3. The demise of Lehman is told in Andrew Ross Sorkin, Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System from Crisis—and Themselves (New York: Viking, 2009). See William D. Cohan, House of Cards: A Tale of Hubris and Wretched Excess on Wall Street (New York: Doubleday, 2009), for the Bear Stearns story.
4. PIPAV.
5. See Paul Volcker, “Commercial Banks Must Match Profitability with Discipline,” Financier, August 1990, Personal Papers of Paul Volcker.
6. The quote is from Financial Services Competitiveness Act of 1995, Glass-Steagall Reform, and Related Issues: Hearings Before the House Committee on Banking and Financial Services, 104th Congress, 1st Sess., March 29, April 5, 6, 1995, Washington, DC: Government Printing Office, p. 89. A related observation is made by Hyman Minsky, Can “It” Happen Again? Essays on Instability and Finance (Armonk, NY: M. E. Sharpe, 1982), p. 101: “Stability—or tranquility—in a world with a cyclical past and capitalist financial institutions is destabilizing.”
7. The legislation in 1999 was the Gramm-Leach-Bliley Act, passed on November 12, 1999, which repealed the provisions of the Banking Act of 1933, commonly called the Glass-Steagall Act. The earlier Fed permissiveness refers to the 1987 decision discussed in chapter 15 dealing with bank underwriting. Volcker dissented from that ruling (see Minutes of the Federal Reserve Board, “Citicorp; J.P. Morgan & Co.; Bankers Trust New York Corporation, all of New York, New York—Applications to underwrite and deal in certain securities,” April 29, 1987).
8. See “Symposium: Early Phases of the Credit Crunch.”
9. See The Financial Services Competitiveness Act of 1995, Glass-Steagall Reform, and Related Issues: Hearings Before the House Committee on Banking and Financial Services, 104th Congress, 1st Sess., March 29, April 5, 6, Washington, DC: Government Printing Office, p. 88. Volcker began his remarks with a reference to Goldman Sachs because the previous day Congressman Toby Roth raised the hypothetical issue of bailing out Goldman Sachs (see Hearings, p. 44).
10. For more details on James D. Wolfensohn and Company, see Joseph Treaster, Paul Volcker: The Making of a Financial Legend (New York: John Wiley, 2004), pp. 194–98.
11. New York Times, May 23, 1996, p. D1.
12. Letter to Paul Volcker from Deborah Sale, vice president, Hospital for Special Surgery, dated March 4, 1997, Personal Papers of Paul Volcker.
13. PIPAV.
14. September 25, 1996, p. A20.
15. See The Disposition of Assets Deposited in Swiss Banks by Missing Nazi Victims: Hearings Before the House Committee on Banking and Financial Services, 104th Congress, 2nd Sess., Washington, DC, December 11, 1996, p. 49.
16. See “Under Fire, Andersen Puts Trust in Volcker,” New York Times, February 4, 2002, p. A18.
17. See Volcker’s testimony on the UN investigation before Congress in Corruption in the United Nations Oil-for-Food Program: Reaching a Consensus on United Nations Reform: Hearings Before the Senate Committee on Homeland Security and Government Affairs, 109th Congress, 1st Sess., Washington, DC, October 31, 2005, pp. 11–26.
18. PIPAV.
19. Statement by Paul Volcker in Support of Barack Obama, Personal Papers of Paul Volcker, excerpted in Wall Street Journal, Washington Wire, Eastern edition, February 1, 2008.
20. Wall Street Journal, October 21, 2008, p. A1.
21. Ibid.
22. From an interview with Austan Goolsbee.
23. See Wall Street Journal, November 8, 2008, p. A4, for the three contenders for the job as treasury secretary: former Clinton treasury secretary Lawrence Summers, Federal Reserve Bank of New York president Timothy Geithner, and Volcker.
24. This story is from Austan Goolsbee. Buffett was born on August 30, 1930, which makes him three years younger than Volcker.
25. The conversation is based on Volcker’s recollection.
26. For a discussion of the transition team, see Washington Post, November 6, 2008, p. A1, and November 14, 2008, p. A6; and New York Times, November 24, 2008, p. A1.
27. See New York magazine, May 31, 2010, p. 25.
28. New York Times, November 27, 2008, p. A29.
29. New York Times, December 6, 1992, p. A1 continued. This quote also refers to the investment banker Felix G. Rohatyn, head of the Municipal Assistance Corporation in New York.
30. Wall Street Journal, November 26, 2008, p. A4.
31. Washington Post, November 27, 2008, p. A1.
32. The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed by President Obama on July 21, 2010, is named after Senate Banking Committee chairman Christopher Dodd and House Banking Committee chairman Barney Frank. The Volcker Rule prohibitions against bank proprietary trading activities and certain relationships with hedge funds are contained in Section 619 of the act.
33. Prohibiting Certain High Risk Investment Activities by Banks and Bank Holding Companies: Hearing Before the Senate Committee on Banking, Housing and Urban Affairs, 111th Congress, 2nd Sess., Washington, DC, February 2, 2010, p. 3.
34. Ibid., pp. 3–4.
35. Volcker’s key PERAB memo to Obama is contained in a cover letter dated June 2, 2009, supported by a statement on systemic risk dated June 3, 2009 (Personal Papers of Paul Volcker). The following excerpt on bank regulation forms the basis of what became the Volcker Rule: “Bank holding companies that engage in non-bank financial services, such as hedge funds, private equity funds, proprietary trading, and certain aspects of derivatives trading and other ‘transaction-oriented’ services, subject their firms to complex risks and, to the extent they also serve customers in a fiduciary capacity, raise potentially unreconcilable [sic] conflicts of interest. Recent events have revealed that these threats, and the implications for the maintenance of management control, are very real and can have severe systemic consequences. As a result, banks should be discouraged from, and in some cases completely prohibited from, engaging in some risk-prone transaction-oriented capital market activities. It will not be necessary to return to Glass-Steagall, which prohibited some ‘relationship-oriented’ services, such as underwriting corporate securities for business customers. However, some revision of Gramm-Leach-Bliley will be required to reinforce protections against banking/commerce combinations and hedge fund or private equity fund sponsorships. The control of banks by individual hedge funds, private equity funds, or commercial firms should be prohibited.”
36. See Prohibiting Certain High Risk Investment Activities by Banks and Bank Holding Companies, p. 49.
37. See Paul Volcker op-ed, “How to Reform Our Financial System,” New York Times, January 31, 2010, p. WK1.
38. PIPAV.
39. See U.S. Treasury, “Financial Regulatory Reform: A New Foundation—Rebuilding Financial Supervision and Regulation,” June 19, 2009, available at web.archive.org/web/20100623205517/
http://www.financialstability.gov/docs/regs/FinalReport_web.pdf
40. Leverage enhances profits when prices rise but can lead to bankruptcy when prices decline. For example, suppose a family with $100,000 in savings pays that amount for a home a few miles outside of Cleveland or Dallas. A drop of $20,000 in the price of the house means a 20 percent loss on the $100,000 investment, but they still have a net worth of $80,000 and can enjoy the benefits of living close to downtown. A family with only $10,000 to begin with could also buy the same house but would have to borrow the remaining $90,000 to complete the purchase. After this leveraged transaction, the identical $20,000 price decline would turn the family’s net worth from plus $10,000 to minus $10,000—the house is worth only $80,000, but they still owe $90,000. The price decline might even force the family to vacate the premises. Leverage can cause bankruptcy when asset prices decline.
41. Prohibiting Certain High Risk Investment Activities by Banks and Bank Holding Companies, p. 22.
42. Ibid., p. 21.
43. Ibid., p. 22.
44. See Markus Brunnermeier, “Deciphering the Liquidity and Credit Crunch of 2007–2008,” Journal of Economic Perspectives 23, no. 1 (Winter 2009): 80–81. “In hindsight, it is clear that one distorting force leading to the popularity of structured investment vehicles was regulatory and ratings arbitrage. The Basel I Accord (an international agreement that sets guidelines for bank regulation) required that banks hold capital of at least 8 percent of the loans on their balance sheets; this capital requirement (called a ‘capital charge’) was much lower for contractual credit lines.”
45. See “Citigroup Says It Will Absorb SIV Assets,” MarketWatch, December 13, 2007, available at www.marketwatch.com/story/citi-plans-to-absorb-49-billion-in-siv-assets-onto-balance-sheet.
46. This quote and the following quotes by Senator Johanns and Volcker come from Prohibiting Certain High Risk Investment Activities by Banks and Bank Holding Companies, pp. 26–28.
47. For a detailed argument against the power of the Volcker Rule to prevent a crisis, and for arguments in favor of more capital, see Lawrence J. White, “The Gramm-Leach-Bliley Act of 1999: A Bridge Too Far? Or Not Far Enough?” Suffolk University Law Review 43 (2009–2010): 937–56.
48. Sorkin, Too Big to Fail, tells the Lehman story well.
49. See “Dollar Hits Two-Year Low vs. Yen; Subprime-Battered Investors Pull Back from ‘Carry Trade,’ ” Wall Street Journal, November 13, 2007, p. C2. Also see “Yen Gets Lift from Turmoil in the Market; Strength Amid Distress Reveals Investor Caution as Carry Trades Unwind,” Wall Street Journal, January 24, 2008, p. C1.
50. Prohibiting Certain High Risk Investment Activities by Banks and Bank Holding Companies, p. 36.
51. Shelby had asked “what constitutes excessive growth” at the largest financial firms? And Volcker gave the pornography answer. See ibid., p. 14.
52. This quote and the remaining quotes in the chapter are from ibid., p. 37.
1. Guardian, London, February 3, 2010, p. 22.
2. The article is entitled “On the Nature of Trading: Do Speculators Leave Footprints?” Journal of Portfolio Management 29, no. 4 (July 2003): 64–70. It was written in connection with my work as an expert witness in a legal dispute over a corporate takeover. The court case was Consolidated Edison, Inc. v. Northeast Utilities. I was retained by Shearman & Sterling on behalf of Consolidated Edison to provide deposition testimony and an expert report analyzing the nature of customer-based trading versus speculation. I applied that analysis to the behavior of the Northeast Utilities energy trading subsidiary in connection with Con Edison’s bid to terminate its takeover of Northeast.
3. I traded on the New York Futures Exchange, the COMEX, and the New York Mercantile Exchange as a scalper, or market maker, and wrote a paper describing that activity entitled “Marketmaker Behavior in an Auction Market: An Analysis of Scalpers in Futures Markets,” Journal of Finance 39, no. 4 (September 1984): 937–54. I traded for a hedge fund called Odyssey Partners, run by Jack Nash and Leon Levy, from 1988 through 1996.
4. The letter, entitled “Congress Should Implement the Volcker Rule for Banks,” was signed by W. Michael Blumenthal, Nicholas Brady, Paul O’Neill, George Shultz, and John Snow, and appeared in Letters to the Editor, Wall Street Journal, February 22, 2010, p. A18.
5. Brady (1988–1993), O’Neill (2001–2002), Shultz (1972–1974), and Snow (2003–2006) served in Republican administrations; Blumenthal (1977–1979) served in a Democratic administration.
6. Milton Friedman was born on July 31, 1912, and died on November 16, 2006.
7. See Bloomberg news report “Ex–Treasury Secretary Brady Running with ‘Volcker,’” at www.nj.com/business/index.ssf/2010/08/ex-treasury_secretary_brady_ru.html.
8. Letter dated May 19, 2010, Personal Papers of Paul Volcker.
9. New York Times, July 11, 2010, p. BU1.
10. See John Cassidy, “The Volcker Rule,” New Yorker, July 26, 2010, p. 25.
11. A copy of the 849-page bill, Public Law 111-203–July 21, 2010, is available at the online Government Printing Office with the following specific address: www.gpo.gov/fdsys/pkg/PLAW-11publ203/pdf/PLAW-111publ203.pdf.
12. Public Law 111-203—July 21, 2010, 124 Stat. 1620.
13. Ibid., 124 Stat. 1621.
14. Ibid., 124 Stat. 1394. Section 111 of the Dodd-Frank Act established the Financial Stability Oversight Council (124 Stat 1392).
15. The council consists of ten voting members and five nonvoting members. The voting members are the secretary of the treasury; the chairman of the Board of Governors of the Federal Reserve System; the comptroller of the currency; the director of the Bureau of Consumer Financial Protection; the chairman of the Securities and Exchange Commission; the chairman of the Federal Deposit Insurance Corporation; the chairman of the Commodity Futures Trading Commission; the director of the Federal Housing Finance Agency; the chairman of the National Credit Union Administration Board; and an independent member with insurance expertise who is appointed by the president and confirmed by the Senate for a six-year term. The nonvoting members, who serve in an advisory capacity, are the director of the Office of Financial Research; the director of the Federal Insurance Office; a state insurance commissioner designated by the state insurance commissioners; a state banking supervisor designated by the state banking supervisors; and a state securities commissioner (or officer performing like functions) designated by the state securities commissioners.
16. See FSOC 2011 Annual Report, available at www.treasury.gov/initiatives/fsoc/Pages/annual-report.aspx, esp. p. 127.
17. See Cassidy, “The Volcker Rule,” for a detailed account of the negotiations.
18. See “Banks Dodge a Bullet as Congress Dilutes Rules,” Bloomberg, June 25, 2010.
19. See WSJ.com, February 3, 2010, 9:16 P.M.
20. Volcker’s letter is addressed to Timothy Geithner as chairman of the FSOC, and is dated October 29, 2010. His footnote reads, “I understand that NYU Professor William Silber, who has served as expert witness in cases requiring identification of, and distinctions between, ‘proprietary’ and ‘market-making’ activity, is providing FSOC with relevant analysis.” My letter to committee chairman Timothy Geithner, dated November 2, 2010, included the following: “The methodology outlined in my paper can be applied to the ban on proprietary trading contained in Section 619 of the Dodd-Frank Act but it should not be viewed as a substitute for a comprehensive approach to implementing the Volcker Rule. In conversations with some of the staff at Treasury I have suggested that you instruct regulators to adapt the practical skills of managers in financial firms whose job it is to distinguish between speculation and market making. For example, during the years I spent as a trader on a number of futures exchanges I was impressed by the ability of my clearing firm to monitor each of their traders’ risk exposure and to impose different capital requirements depending on whether the trader was a market maker or a speculator. The manager at the clearing firm looked at the sequence of a trader’s transactions, the rate of inventory turnover, end-of-day positions, and then supplemented those numerical facts with surprise visits to the trading floor to see what a suspected ‘closet speculator’ was actually doing. I think that regulators monitoring the implementation of the Volcker Rule ban on speculation should arm themselves with a variety of methodologies, including the analysis outlined in ‘Do Speculators Leave Footprints?’ They should establish the same type of multi-dimensional approach that the IRS uses to identify tax evasion, including face-to-face audits where that is indicated.”
21. See “Wall St. Faces Specter of Lost Trading Units,” New York Times, August 6, 2010, p. B1.
22. See “Morgan Stanley Team to Exit in Fallout from Volcker Rule,” Wall Street Journal, January 11, 2011, p. C1.
23. See “Wall St. Faces Specter of Lost Trading Units,” New York Times, August 6, 2010, p. B1.
24. See “With Big Banks Forced to Exit, Look for Speculators to Step In,” Wall Street Journal, September 7, 2010, p. C10.
25. See Michael Lewis, “Wall Street Proprietary Trading Under Cover,” Bloomberg Opinion, October 27, 2010, 4:48 P.M.
26. Study & Recommendations on Prohibitions on Proprietary Trading & Certain Relationships with Hedge Funds & Private Equity Funds, Financial Stability Oversight Council, January 2011, p. 4, at www.treasury.gov/initiatives/Documents/Volcker%20sec%,20%,20619%,20study%,20final%,201%,2018%,2011%,20rg.pdf.
27. For a complete list of the metrics see ibid., pp. 39–43.
28. Ibid., p. 44.
29. Prohibiting Certain High Risk Investment Activities by Banks and Bank Holding Companies, p. 37.
30. See page 2 of Volcker’s letter addressed to Timothy Geithner as chairman of the FSOC, dated October 29, 2010.
31. Study & Recommendations on Prohibitions on Proprietary Trading & Certain Relationships with Hedge Funds & Private Equity Funds, p. 3.
32. Ibid., pp. 35–36.
33. See “Volcker Rule May Work Even If Vague,” New York Times, January 21, 2011, p. B1.
34. “Volcker Rule Should Require Sign-off by Bank CEOs, Panel Says,” Bloomberg, January 19, 2011, available at www.bloomberg.com/news/2011-01-19/volcker-rule-should-require-bank-ceos-to-certify-compliance-panel-says.html.
35. Ibid.
36. See “Volcker Rule May Work Even If Vague,” p. B1.
37. Paul Volcker, Mais Lecture, Cass Business School, London, July 14, 2011.
1. The Wall Street Journal ran an op-ed piece by Lewis Lehrman on August 15, 2011, the fortieth anniversary of the suspension of dollar convertibility, entitled “The Nixon Shock Heard ’Round the World.” The facts are mostly right, with one big exception. Lehrman writes (Wall Street Journal, August 15, 2011, p. A13), “At least one Camp David participant, Paul Volcker, regretted what transpired that weekend.” The suspension of convertibility was, in fact, Volcker’s idea (see chapter 3), and he does not think it was a mistake.
2. See chapter 2 on the gold cover. The requirement that the Federal Reserve hold gold certificates against bank reserves was removed in 1965, and the requirement against Federal Reserve notes was eliminated in 1968.
3. This inscription appears on the face of every Federal Reserve note. Check your pocket.
4. See Friedman’s testimony in “Gold Cover,” Hearings Before the Committee on Banking and Currency, U.S. Senate, 90th Congress, 2nd Sess., February 1, 1968, p. 152.
5. Irving Fisher was a professor of economics at Yale University from 1898 until 1935. His most important books include The Rate of Interest (Macmillan, 1907), The Purchasing Power of Money (Macmillan, 1911), and The Making of Index Numbers (Houghton Mifflin, 1922). In Money Mischief (New York: Harcourt Brace, 1994), p. 37, Milton Friedman calls Fisher “the greatest economist the United States has ever produced.”
6. The quotes in this paragraph are from Friedman, Money Mischief, pp. 252 and 254.
7. For a general discussion on the origins of the Great Inflation, see Allan Meltzer, “Origins of the Great Inflation,” and Christina Romer, “Commentary,” in Reflections on Monetary Policy 25 Years After October 1979, Federal Reserve Bank of St. Louis 87, no. 2, part 2 (March/April 2005).
8. See chapter 14 for the discussion of the passage of the Gramm-Rudman-Hollings amendment to balance the budget.
9. Federal Reserve press release available at www.federalreserve.gov/newsevents/press/monetary/20110809a.htm.
10. PIPAV.
11. Paul Volcker, “A Little Inflation Can Be a Dangerous Thing,” New York Times, September 19, 2011, p. A27.
12. According to Federal Reserve chairman Ben Bernanke, “Even after economic conditions have returned to normal, the nation faces a sizable structural budget gap. Both the Congressional Budget Office and the Committee for a Responsible Federal Budget project that the budget deficit will be almost 5 percent of GDP in fiscal year 2015, assuming that current budget policies are extended and the economy is then close to full employment.” See “Fiscal Sustainability,” Remarks by Ben S. Bernanke, Annual Conference of the Committee for a Responsible Federal Budget, Washington, DC, June 14, 2011, p. 1, available at www.federalreserve.gov/newsevents/speech/2011speech.htm.
13. Paul Volcker, “A Little Inflation Can Be a Dangerous Thing,” New York Times, September 19, 2011, p. A27.
14. See WSJ.com, October 19, 2011, 10:27 A.M.
15. See “Fiscal Sustainability,” Remarks by Ben S. Bernanke, Annual Conference of the Committee for a Responsible Federal Budget, Washington, DC, June 14, 2011, available at www.federalreserve.gov/newsevents/speech/2011speech.htm.