“We can all recite a rather long list of culprits contributing to the financial crisis. What I want to raise is what seems to be a neglected question. Has the absence of a well-functioning international monetary system been an enabling (or instigating) condition? Did the absence of international oversight, of discipline in financing, of exchange rate management permit…even encourage…unsustainable imbalances in international payments and in domestic economies to persist too long?”, Paul A. Volcker

“Many have pointed, for instance, to the huge imbalances at the beginning of this century in international payments between the United States on the one side and China and Japan on the other…the largest economies in the world. Those imbalances were easily financed. The result was that a high degree of liquidity at low interest rates could be maintained in the United States, despite the virtual disappearance of domestic savings. The subprime mortgage phenomenon was an outgrowth. …Where was an effective adjustment mechanism? Was the “exorbitant privilege” of the dollar as a reserve currency also a “dangerous temptation” to procrastinate…an impediment to timely policy adjustments, risking eventual breakdown? The current travails of the Eurozone (the equivalent of an absolute fixed exchange rate regime) carry interesting lessons. A single currency with free flows of funds among member states could not substitute for the absence of a unified banking system and incentives for disciplined and complimentary national economic policies. That is a long introduction to a plea…a plea for attention to the need for developing an international monetary and financial system worthy of our time.”, Excerpt from Paul A. Volcker’s remarks at the Annual Meeting of The Bretton Woods Committee, “A New Bretton Woods???”, May 21, 2014

“The truth is being revealed by the day. “Most of all”, Mr. Volcker says “the underlying failures of our national economic policies”, especially as they relate to the international monetary system, was a key culprit of the U.S. and global financial crisis. While I don’t agree with everything Mr. Volcker says in this paper (He is a big believer that institutions and elites know what is best. I am more skeptical. For example, he makes clear that he doesn’t like a free-floating market-based international currency system, but also points out that we have never had one. We have had ”a hybrid”, with some free-floating, some semi-free, and others arbitrarily fixed. He also is a Fed man and I believe the Fed had a major, unintended role in causing this crisis.), I do think Mr. Volcker is right that long-term trade and payment imbalances were a major cause of the crisis, and that even today this issue is largely not being discussed, let alone addressed. (By the way, Mr. Volcker is pretty harsh in his comments about bankers and other market institutions, but has no problem readily admitting that on what he believes has been one of the most important unaddressed issues “for decades”, our international monetary system….that even now, he really doesn’t know what the solution should be. So in other words, government mistakes and inaction are excused, yet much smaller private-sector mistakes or inaction, “instigated” (his word not mine) by government mistakes and inaction, are not. That seems wrong to me.”, Mike Perry, former Chairman and CEO, IndyMac Bank

Remarks by Paul A Volcker 21 May 2014 “A – New Bretton Woods???

 

Posted on June 12, 2014, in Postings. Bookmark the permalink. Leave a comment.

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