Volcker Calls for Banking Reform, Says Any Inflation Brings Risk in Keynote to Conference on Financial Crisis
Feb. 20, 2009
Watch Prof. Edmund Phelps, President Lee C. Bollinger and Paul Volcker speak at Friday's conference. (7:12)
The current financial crisis will transform the way the financial system works, said Paul Volcker, chairman of President Obama's Economic Recovery Advisory Board, in the keynote luncheon address Friday at the Columbia Center for Capitalism and Society's sixth annual conference, "Emerging from the Financial Crisis."
After much of the damage is dealt with, he said, the banking structure “will not revert to the kind of financial system we had before the crisis, I don’t think that is going to happen.”
Volcker also said that while some economists and politicians may say that it is worth risking some inflation in order to right the economy, he is not among them. "I think a little inflation is bad, because a little inflation leads to more inflation, and I don't think there's any argument for a little inflation solving any of our problems in any realistic sense," Volcker said.
Volcker's half-hour speech, introduced by Columbia President Lee C. Bollinger, ranged from the causes of the financial crises to the possible impact that the Federal Reserve's response to the crisis will have on the future role of the central bank. And he said that the “massive economic and financial crisis,” is a “challenge to capitalism and society.” When people ask him whether he thinks capitalism will survive, he answers yes, he said, “but I’m not so sure about financial capitalism.”
He described this crisis as a result not only of a lack of regulation and supervision, but an increase in the number of “financial engineers” creating new financial products, whose reliance on math and formulas, he said, "succeeded in obscuring the weaknesses" in the financial system.
As chairman of the Federal Reserve from 1979 to 1987, Volcker is widely credited with taming inflation during his tenure. The current financial crisis, he said, is unlike previous recessions in that it was not brought about by tight credit and high interest rates but by an excess of capital.
Going forward, he spoke of maintaining a few "stable, strong banking institutions responsible for the backbone of the infrastructure, the payment system, clearing arrangements, that kind of thing" and said, "let's prohibit them from really high risk activity." He also called for "closer international coordination" among financial institutions.
The conference began with introductory remarks from Columbia Prof. Edmund Phelps, director of the center and the 2006 Nobel laureate in economics. Featured speakers from Columbia on the morning agenda included Prof. Joseph Stiglitz, the 2001 Nobel laureate in economics, and Prof. Amar Bhidé of Columbia Business School, in addition to Christine Lagarde, France's minister of economics, industry and employment. Dinner speakers are George Soros, chairman of Soros Fund Management, and Josef Ackermann, chairman of Deutsche Bank’s management board.
A fuller report on the all-day conference will be published in the next issue of The Record.