Former Fed chairman blames pay bonanza for the financial crisis
'The managers didn't know what they were doing ... They were trying to turn dross into gold. We had a lot of alchemists out there'
- guardian.co.uk, Monday November 17 2008 15.21 GMT
-
larger | smaller - Article history
Former US Federal Reserve chairman Paul Volcker. Photograph
Paul Volcker, the central banker responsible for crushing inflation in America in the 1980s, today blamed excessive pay packages for leaving the world with a "broken financial system".
Speaking in London, the former chairman of the Federal Reserve who some have tipped for a key role in Barack Obama's new administration, said there had been "tremendous rewards and payments of magnitude for presumed success and not much penalty for failure."
Volcker said the other main culprit for the current crisis was financial engineering, with securitised loans, credit default swaps and other derivative products trumpeted as a way of minimising and distributing risk. "In fact, the managers of organisations didn't know what they were doing and were not in control. They were trying to turn dross into gold. We had a lot of alchemists out there."
In the immediate aftermath of Obama's victory a fortnight ago, it was rumoured in Washington that he might turn to the 81-year-old Volcker to be his Treasury secretary.
More recently, the man who ran the US central bank from 1979 to 1987, there has been speculation that he will head an investigation into the causes of the credit crunch and its possible cures. He declined to comment on the speculation today.
The former Fed chairman said he favoured breaking up banks into smaller units, the opposite of the trend of the past two decades. "Banks are going to fail so keep them individually small so that the failure of one can't upset things."
The bigger the banks were, Volcker added, the tougher the controls would have to be on their activities. "If a bank is big it is going to be protected but it will be supervised, regulated and probably prohibited from doing certain things that are considered particularly risky."
Speaking at a symposium organised by Lombard Street Research, Volcker said the US was facing a prolonged downturn. "Nobody thinks we are going to be through this in a hurry. We can argue about how deep it's going to be but it is going to go on a while."
The first big challenge for the new president, Volcker added, would be the crisis in the US automobile sector, which was of profound importance both for the wider economy and for the financial markets. "Throwing money isn't going to do it (solve the problems of the car makers). Maybe the sector needs money, but in a constricted framework."
No comments:
Post a Comment