About this time last year, when the big U.S. banks were launching their full-court press against major reforms that would restrict their ability to wheel and deal in the markets, Paul Volcker was being dismissed as an out-of-touch relic trying to turn the clock back to the days when commercial banks behaved more like boring public utilities.
Today, the former U.S. Federal Reserve chief, who has just turned 83, is back in the spotlight, thanks to his behind-the-scenes role in shaping legislation that includes his key proposal to curb certain speculative banking activities. But just wait until the politicians hear what he would like to do with the shattered U.S. mortgage market.
But first, a brief update on financial reform.
As expected, the much-vaunted Volcker rule to restrict banks from trading securities for their own accounts, operating hedge funds or dabbling in private equity didn't survive the assault of the bank lobbyists intact. The industry didn't spend record sums for nothing. When the massive U.S. financial reform bill was signed into law in July, banks retained the ability to plow cash into hedge and equity funds and to trade government securities and foreign exchange instruments. Much of the rest has been left in the hands of under-equipped regulators to sort out, including new rules on capital and leverage. And at the end of the day, the biggest players seem likely to wind up with even more clout than before.
But Mr. Volcker is undeterred by the obstacles, the compromises or the complaints of critics who argue that banks will still have plenty of incentives to take outsized risks.
Most of Washington was intent on including "a rather pure version of what I was proposing," Mr. Volcker said in a phone interview from his office in midtown Manhattan. Last-minute tradeoffs, notably on the amount of capital that financial institutions could pump into equity and hedge funds, "certainly reflected bank lobbying."
But he did succeed in his key goal of getting banks out of most proprietary trading - a source of huge potential profits, losses and conflicts of interest. Just last week, reports surfaced that Wall Street powerhouses Goldman Sachs and JPMorgan Chase are already shuttering their self-trading desks.
"I've been kind of bemused by the comments of a lot of bankers that they'll try to do proprietary trading by hiding it in other [permissible]trading. Kind of an odd course to take when the law has just been passed. It says something about the ethical standards of banks, I guess."
One vast, devastated part of the U.S. capital markets that remains to be dealt with is residential mortgages, which Mr. Volcker describes as "almost wholly a government-owned subsidiary."
Fixing this mess will take years and will mean attracting financial institutions back into the market, and eventually doing away with failed giants Fannie Mae and Freddie Mac, those peculiarly American hybrids, which control more than half the $12-trillion (U.S.) market and now operate as wards of the state.
"I'd like to see the mortgage market develop in such a way that the banks can make some money there and participate," Mr. Volcker says, citing the Canadian market as a good example. "What should be done is very simple. Fannie and Freddie were misconceived in the first place," as half-public, half-private entities with implicit government guarantees.
Mr. Volcker, who made his formidable reputation by slaying the inflation dragon when he ran the Fed in the 1980s, refuses to be drawn into any discussion of current monetary policies. Some economists have been urging central banks to stop obsessing about inflation and keep interest rates at record lows, even if prices rise above their target range. Not surprisingly, the old central banker disagrees. There is no contradiction, he insists, in the Fed's twin mandate of price stability, which means keeping a watchful eye on inflation and deflation risks alike, and full employment.
"My general feeling is that over time there is no competition between that so-called dual mandate. Price stability is good for the economy. That's a focus that they ought to keep in mind. That's been the lesson of the past few decades. Until recently, nobody questioned that doctrine."
Mr. Volcker will undoubtedly underline that view when he appears at the Canadian Economic Forum in Toronto on Oct. 6. Alan Greenspan, his Fed successor, appeared at the same gathering in 2007. Just don't expect Mr. Volcker to dish dirt on Mr. Greenspan or the policies of Ben Bernanke, the current occupant of that particular hot seat.
"I have an opinion, but I don't want to make remarks about monetary policy. I don't want to find myself looking over the shoulders of the Federal Reserve all the time."