re: Former Fed Chair Volcker Sees "Some Resemblance" To 1970s Inflation
The U.S. economic health is worse than 1970s with the recent oil price hype and the ARM meltdown swindle.
Volcker is the father of U.S. bubble.
Greenspan is the big bubble maker.
~~~
Former Fed Chair Volcker Sees "Some Resemblance" To 1970s Inflation
5/14/2008 2:17 PM ET
Stagflation and the Federal Reserve's role as regulator were two key topics discussed Wednesday during a hearing before the Congressional Joint Economic Committee. Former Fed Chairman Paul Volcker testified before the committee, chaired by New York Senator Charles Schumer.
Volcker joined the growing consensus that the Federal Reserve, in light of recent problems undergone by financial institutions including the near-collapse of Bear Stearns, should have increased regulatory power.
"Large commercial banks have themselves taken on important characteristics of investment banks, but the investment banks and hedge funds that have come to dominate the trading, if regulated at all, have not been closely supervised with respect to their safety and soundness," he said.
Meanwhile, Schumer echoed the cautious optimism of many economists that the credit crunch is nearing its end.
"I share with Treasury Secretary Paulson and Chairman Bernanke the hope that the worst of the
credit crisis is behind us," he said. "But I am not convinced that it is over."
Schumer called for a variety of new measures, including increased transparency and stricter regulation of investment banks. He also chimed in on Treasury Secretary Henry Paulson's calls to update supervision of the financial sector, which is currently operating under rules drafted during the Great Depression.
"In my view, this credit crisis is as much a failure of regulation as it is a failure of the marketplace," the New York Senator said. "We have a 21st century global financial system, but a 20th century national set of financial regulations. That needs to change soon."
Although Volcker was supportive of the Federal Reserve taking a more active role and becoming the principal financial regulator, he said that the bank "is not equipped to do it now."
The former Fed Chair voiced the concerns of many that there is a risk that, under the current market circumstances, 1970s style stagflation could rear its ugly head.
"I think there is some resemblance now to inflation in the early 1970s," he cautioned.
Although many Federal Reserve officials expect inflation to moderate, Volcker noted that "there is an underlying tendency to inflation."
Tuesday, San Francisco Federal Reserve Bank President Janet Yellen called recent data on inflation "disappointing," acknowledging that some are concerned that stagflation could become a threat.
"Even if the direct influences of commodity prices on inflation eventually dissipate, they could still cause trouble," Yellen said. "Some fear that the specter of stagflation may rear its ugly head as it did in the 1970s and early 1980s."
However, Yellen does not believe we are about to enter a period of stagflation, rather forecasting that "over the next couple of years…total and core inflation will moderate from present levels."
Increasing the Federal Reserve's oversight would likely involve the creation of a new position, Volcker said. However, being a regulator is a somewhat thankless position, the former Fed Chairman suggested.
"The life of a regulator is not a happy one. When things are going well no one wants to be regulated," he said. "When things go bad, everyone asks, 'Where were you?'"
Volcker's view that the Fed should take on a larger role was widely supported, although those preferring a more lassiez-faire approach disagreed. Texas Representative Ron Paul, known for being a proponent of small government, argued that a larger Fed would make the problem worse.
"The consensus seems to be we need more regulation. That to me is like saying if you have a drug addict going through a painful withdrawal, you give him another fix," Paul said. "The market is a good regulator."
News 
Market Data 
Discover 
