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Volcker Says Too Soon to Cut U.S. Monetary, Fiscal Stimulus
March 06, 2010, 6:04 PM EST
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By Rainer Buergin and Philipp Encz
March 7 (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 yesterday, 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, who wrote the blueprint for banking proposals that President Barack Obama sent 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 bans 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 hasn’t seen the “precise language” of Obama’s legislation, said he doesn’t believe the bill 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 Berlin to give a speech to the American Academy and pointed to the “abuse” of derivatives to hide the scale of Greece’s budget deficit as an example highlighting the need for tighter regulation of the securities.
“Surely the recent revelations about the use (and abuse) of complex derivatives in obscuring the extent of Greek financial obligations reinforces the need for greater transparency and less complexity,” Volcker said in his speech yesterday.
--With assistance from Rebecca Christie in Washington. Editors: John Fraher, Mark Rohner
-0- Mar/06/2010 23:01 GMT