HBO History Makers Series with Paul Volcker

Monday, May 6, 2013

Paul Volcker discusses the U.S. economy and his career.

The Home Box Office History Makers Series focuses particular attention on the contributions made by a prominent individual at a critical juncture in international relations. Recent speakers include Stanley McChrystal, Erskine Bowles, and Madeleine K. Albright.

ANDREW ROSS SORKIN: We might be on by now. Let me welcome everybody to the Council on Foreign Relations' History Makers Series with Paul Volcker. The history series, we should note, focuses on the contributions made by a prominent individual at a critical juncture in U.S. foreign policy or international relations, and we're probably going to get to some of that. And also, I would like to say on behalf of the council I'd like to thank Richard Plepler, a good friend, and HBO for their generous support of this series. And we're going to try to turn this as much into a conversation as possible. So we're going to chat for a little bit, and then we're going to open it up and have a conversation with you.

Because this is a history series, and yet I imagine there's a lot of people in this --

PAUL VOLCKER: My history goes back a ways.

SORKIN: Your history goes back a ways. But I also imagine there's a lot of people here who want to hear your views on what's happening now. I'm going to try to relate as much as I can some historical context to some of the issues and pressing issues of the moment.

And so let me start with this. You were quoted just a couple of weeks ago talking about how difficult and how nervous you are about the period that we are in now financially, fiscally and the challenges facing Ben Bernanke in terms of -- and I don't want to put words in your mouth, but whatever the exit ultimately look like. Put this in historical context. How hard is his job today versus your job circa 1980?

VOLCKER: Well, of course, mine was infinitely harder. (Laughter.) A piece of cake now.

No, you know, it's a very different circumstance. We had this -- when I became chairman, I inherited this considerable inflation, which was accelerating. And I think then, I think now, the mood in the country was, you know, something had to be done about inflation. And of all the powers that the Federal Reserve has, they have powers to do something about inflation, if you use them. Now, Chairman Bernanke's problem is the opposite. Fed Reserve has all the powers it needs to deal with inflation. Doesn't have all the powers you need to create business expansion when you have the economy as far out of whack as this one is.

Now, I think there's some danger, actually, that -- with all the talk about the Fed Reserve hanging on every meeting and so forth: It assumes they have powers beyond what they have. They -- (chuckles) -- the profession of economics has demonstrated amply in recent years that it hasn't reached a point of being able to predict what happens six months from now, much less what happens two or three years from now, which -- you have this feeling that if they only do it right, some particular date in the future, the GNP will be what and the inflation will be what.

Isn't that easy. The economy has a lot of imbalances that are beyond the control of the Fed Reserve, including all the inherited debt, which, of course, is a big part of the problem. We've had the manufacturing industry decimated, they were big employees, over a 10-year period or a 15-year period. There's nothing they can do change that magically in a predictable way. I hope obviously it improves over time. We have external imbalances. Can't be directly controlled by the Fed Reserve.

SORKIN: So what's going to happen?

VOLCKER: What's going to happen? We're going to slog along like we're doing.

SORKIN: For how long?

VOLCKER: We're talking about history. We're not talking about future. (Laughter.) I'm not (as dumb ?) as I --

SORKIN: Do this for us. You are someone who understands the history of inflation very well. And one of the great worries of the moment is that at some point, there is going to be inflation writ large. First of all, do you agree with that assessment?

VOLCKER: Well, I don't think it's inevitable. I -- obviously, (if ?) the thing is mishandled over a period of time, we could have a big inflation some time in the future. Right now, with the excess unemployment, with wages restrained, to say the least, with the rest of the world, as bad as our economy is, we look brilliant compared to a lot of -- part of the world. And this is not an environment that creates inflation, and I don't see any immediate problem there.

But sure, when we get a little momentum in the economy some day, and there's a tremendous amount of potential and actual liquidity that's been put into the economy and we're running big deficits, yeah, you could be having inflation. But I don't think it's imminent tomorrow or next year. I mean, tomorrow is an extended period of time.

SORKIN: There's a lot of worry today that the Fed is not as independent perhaps as some people would like to be. And I'm hoping that there's a history lesson you can provide us with. I want you to take us inside -- I want to know the relationship historically between the Fed chairman -- what conversations really happened between the Fed chairman and the president when it comes to Fed policy?

VOLCKER: Well, I was only one Fed chairman. And we didn't communicate all that much. I was -- (laughs) -- but you know, I'd be typical. But this business about the independence of the Federal Reserve -- there are obviously always analogies with what went on in the past. What keeps -- what I keep reminding of -- when I was a new fellow in the Federal Reserve, and then the Treasury -- now I'm going back 50, 60 years -- interest rates were held at approximately the level they are now for 15 years, began in the -- in the Depression, began in the late '30s, in the mid-'30s, continued during the war, continued in the face of inflation after the war for about 15 years. And everybody said, well, what's going on here; Federal Reserve has no independence. They got increasingly restive.

And it was true during that period I -- when they started in the '30s -- and the law had just been changed. I think they did it of the wrong volition. They agreed to hold those rates the same during the war, when we were at war. And then after the war, they continued to hold them, and the question was, of their own free will, or was it imposed upon them? And there was no question that the administration clearly, evidently, publicly wanted those interest rates to be maintained. And so it was a legitimate question to ask about the independence of the Federal Reserve. I happened to -- I don't have a chance to advertise this very often.

I wrote my senior thesis at Princeton when I was there in 1949 about Federal Reserve policy in history, and concentrating on postwar Federal Reserve policy. And I put the rather nasty conclusion in that if the Federal Reserve's always going to do what the Treasury wants, you might as well put it in the Treasury. Now, that was not what I -- was not my preferred course, but -- (laughter) -- it reflected that frustration.

And then there was an open fight about it with the president, and the president actually lost. I -- Truman actually hauled the Open Market Committee over there and said, you know, don't change. And he announced it in a press conference or something. That press statement the next day, that got Federal Reserve -- so they released the minutes of the meeting, which said they didn't agree, and then it kind of exploded. And the Federal Reserve's independence was restored with the accord.

Now, I hear -- you know, I hear -- not so much, but you hear this talk about their independence has been impaired because of the things that they've done, and they certainly did these things alongside the Treasury and the -- and the administration. But you get an emergency like this -- obviously, they were working because of it. It would have been totally irresponsible that they hadn't been working together with some degree of coordination, at times a high degree of coordination. That does not at all reflect the fact -- crisis is over; you go ahead and you're independent.

SORKIN: So when you see the Fed, for example, target, though, unemployment rate, how do you think about that?

VOLCKER: Well, all right. Well, I -- for the reasons I suggested earlier, the uncertainty surrounding all that, I don't like targets all that much, that you can't meet particularly.

SORKIN: So you don't -- well, let's just go -- let's drill there for a second. You don't -- you said it's a target you don't think we're going to be able to meet?

VOLCKER: So I don't think you -- there's any assurance you can meet a particular target at a particular date. It's like any forecast; you're forecasting the amount at the time. Sooner or later, yeah, we'll hit the target. But it implies a degree of precision that doesn't exist. But now you got me off my answer. What was it? (Chuckles.)

SORKIN: You were going to --

VOLCKER: I had a profound point to make here. (Laughter.)

SORKIN: We were talking about the politics of the Fed, the independence of the Fed. I mentioned the employment rate and whether that was considered political.

VOLCKER: Oh, no, I remember what I was going to say. You know, apart from the close cooperation during the depths of the crisis, which is normal, the question is, I think, legitimately raised with the breadth of action that the Federal Reserve is taking now. What does that imply for the future? That goes beyond what is considered orthodox central banking policy, not just in the United States or elsewhere, where you leave the distribution of credit up to the market and you manage the liquidity at the margin. And that has effects on interest rates, but you don't try to pick winners and losers, so to speak.

So this is, I think, something of a challenge as to how you retreat. We are in a situation now where the biggest part of our capital market of this great, free and open economy we have, the biggest part of the capital market is residential mortgages. Residential mortgage is now a phenomena of government policy. And you know, it's hard to think that this is a permanent solution to things. I don't know how, between insuring the mortgages and buying the mortgages -- I don't know what the number is. Eighty, 90 percent of all the mortgages are government-dominated. Now, that is not, you know, a signal of a free and open capital market, and if the Federal Reserve persisted in that, it'd raise a question. Now, obviously, they're going to try to pull back.

But we have a big challenge here in reconstructing a mortgage market that's not dependent on government intervention.

SORKIN: How would you do it?

VOLCKER: Slowly. (Laughs.) No, you can't do it overnight. We had -- you know, Fannie Mae and Freddie Mac got bigger and bigger. And they had this hybrid thing that it was neither foul nor fair or whatever, got them into trouble, eventually got the country into trouble. I think the first thing we ought to do is say, well, let's not do that again, no more hybrid institutions, big, powerful hybrid institutions. If the government wants to intervene and have some authority to intervene, set up a government agency to do it, which is in fact, what you did before '69.

But I think we have to, to some degree, reshape the mortgage instrument itself. You don't have to eliminate our favorite 30-year fixed-rate mortgage market or bah-bah-bah, but that doesn't need to be the only kind of mortgage instrument. I'd like to -- I'd like to see a mortgage instrument that banks would feel able to hold, which would be shorter-term and some flexibility in the rate.

SORKIN: What are we talking about, 15-year, 10-year?

VOLCKER: Well, see, Canada's come down to five-year, 10-year. Now --

SORKIN: What happens to the real estate market if you do that? What happens to the economy if you do that, short-term and then long-term?

VOLCKER: What happens is you got a terrific, self-sustaining mortgage market. And you know, everything's happy. What -- just look at Canada. That's what they do. Now, they have a fair amount of government intervention too, but they actually -- (chuckles) -- they've had a pretty good rise in housing prices recently -- but the mortgage market in Canada is largely an institutional market, the big banks. It's a nice, continuing, reasonably safe source of income for banks.

You can't do that anymore with a 30-year fixed-rate mortgage; they don't have 30-year fixed-rate mortgages, not many anyway. And it works perfectly well, and you get a mortgage, you know the rate may be changed after five years or after 10 years or whatever it is, but you know the banks are likely to stay with you and put some caps around it and so forth. It's a better -- I think, a more stable system demonstrably than what we have.

Now, you can still -- the securitization market's dried up, but I'm not saying you can't have some securitization. That's where the 30-year fixed-rate --

SORKIN: There's going to be some pain along the way.

Let me move on because I want to talk about -- I want to talk about politics for just a second

VOLCKER: (Inaudible.)

SORKIN: Politics of housing?

VOLCKER: What did you say?

SORKIN: No, I said politics. I want to talk about politics.

VOLCKER: Oh, politics -- I don't know about politics.

SORKIN: Well, I want to talk about the history of politics a little bit, because you lived through a pretty tumultuous time. And there's a -- there's a -- we're living in a period now where there's a view that somehow, we're more polarized than ever, that Washington can't get its act together. Just --

VOLCKER: I agree with them. (Laughs.)

SORKIN: But give us a comparison. I mean, I -- now compared to then.

VOLCKER: Oh, I'll tell you now -- I mean, you want now compared to then, all you got to do is have your eyes open when you go to Washington. When I first went into government in the '70s, there was not a modern luxury hotel in Washington. There was one restaurant that was considered up to kind of two-or-three-star magnitude, a couple of old hotels; population, I don't know, was maybe half a million, the suburbs were not built up.

You go to Washington now -- well, and the biggest thing, just to get to the point -- there were three or four kind of prestigious local law firms there. And the best ones probably had a floor in an office building and as they flourished, they may have had two floors. Now, the law firms have the whole office building, the whole block. And that may not be enough; they may have to buy another office building.

And you go down to Washington and see the building in Washington between 16th Street and the railroad station and when you got beyond 13th Street, it used to be kind of -- it wasn't a slum, but it was kind of -- (scattered laughter) -- hangdog. It's now all -- God, there are probably four big hotels right in that little area.


VOLCKER: This is -- this is a city which is thriving on lobbying. That's what -- what's the business. The business is lobbying -- and a lot of money in that. And that makes it different. It makes it harder to govern, in my opinion.

SORKIN: If there was an effort to have to have a grand bargain on the scale that people talk about today, a Bowles-Simpson kind of plan, could it have been passed 30 years ago?

VOLCKER: Well, I think like Bowles-Simpson on the tax side passed in '86, and very similar to what -- they got rid of a lot of the exceptions and a lot of the exemptions. And they brought the rate down, God, I think, to 25 percent.

SORKIN: But we didn't deal with entitlements in the same way.

VOLCKER: Well, we dealt with --

SORKIN: A little bit, but --

VOLCKER: Well, a little bit. Quite a lot. Maybe not as much as -- well, you know, I don't follow this that closely, but when I read Simpson-Bowles, they talked about -- we're going to deal with entitlements, but they never got down to saying which one and how much. Now maybe they do now, but they didn't in their original report. They said, you know, you go pick. This is our --

SORKIN: Right.

VOLCKER: -- this is our garden. You pick which roses you want.

So they didn't come face to face with this, and I -- on my own just -- I think we rely too much on the income taxes, if you want to know. (Chuckles.)

SORKIN: So what would do?

VOLCKER: I -- well, I would do is have a -- I'd begin thinking we ought to have some taxes on consumption. Now there's various --


VOLCKER: -- various ways of doing it. And nobody likes the VAT, so OK, we'll call it something else. (Laughter.) No, and we may be -- you know, more than -- we got one stone for several things.

I am concerned about global warming and carbon and energy and all that stuff. So why don't we have a carbon tax or -- I'd like the tax better than the idea of the cap-and-trade thing, which was tried. But this is becoming an urgent affair, both where you could mix a fiscal result with an economic/social result that we need.

Now I'm not saying the income tax doesn't need reform. The corporate income tax certainly needs reform. But I have my doubts that you can do enough sustainably on the income tax to produce a balanced budget in three or four years.

SORKIN: OK. I have a couple more questions. I'm going to open it up to the audience. And I want to talk specifically about a rule named after you, called the Volcker rule.

VOLCKER: It's a good rule.

SORKIN: It's a good rule. (Laughter.) But I want to --

VOLCKER: It's a good rule. I don't know why they're laughing at it. (Chuckles.)

SORKIN: I want to go back to Glass-Steagall, because there's been a great debate, even in this building -- and when I say "in this building," I'm thinking of even Bob Rubin and others, Hank Paulson -- I remember I interviewed him here -- who have said that getting rid of Glass-Steagall did not create the financial crisis of 2008. Do you agree with that?

VOLCKER: Well, there -- no law created the financial crisis. Human beings created the financial crisis. Whether the --

SORKIN: But had Glass-Steagall been in place, are you convinced that we would have not had a financial crisis? Because that's been the argument.

VOLCKER: No, I'm not convinced, because those investment banks, which were free of the Glass-Steagall restrictions, by definition, were a big part in the ballooning of the housing market and everything else too.

No, I'm -- I -- you know, when people talk about Glass-Steagall -- and this was an active debate when I was there; it's been an active debate for years -- but you thought of Glass-Steagall as prohibiting two things. Mainly, you thought of it as prohibiting something called investment banking by -- in those days, what you thought of investment banking was issuing securities, underwriting securities and doing M&A stuff and doing trading in financial instruments, but the trading end was subdued by present standards.

And you know, talk about the Volcker rule -- it was very liberal. Glass-Steagall says no trading, period, except for government securities and some other things.

But I mean, when I was there, it had lost meaning, it seemed to me, to prohibit banks from doing underwriting for the same customer they were making loans to and getting into the M&A business. And that was the heart and soul of Glass-Steagall.

Now a lot of this stuff -- derivatives didn't exist then.

SORKIN: So do you --

VOLCKER: (Chuckling.) Or credit default swaps didn't exist then.

SORKIN: So does the Volcker rule, in your mind, then go far enough?

VOLCKER: Didn't go far --

SORKIN: No, does it go far enough in taking care of -- because it doesn't cover --

VOLCKER: Well, no, it's one of a lot of things. You've got to have capital requirements. You got to do something about "too big to fail." You got to do something about trading in derivatives. The Volcker rule is one significant --

SORKIN: So does Dodd-Frank succeed in solving all of our problems?

VOLCKER: No, of course not.

SORKIN: If you could rewrite it, what would you do?

VOLCKER: Well, I'd rewrite it. It'd be shorter, sure, but -- (laughter).

(Chuckles.) But look, I'll tell you one gap that's very obvious in -- well, I'll give you -- I'll give you two. They backed off from doing anything about the structure of regulatory agencies, because they got in the middle in this and they said, oh, my God, that's too much of a political problem; we better not take it on.

So they basically did nothing about the existing structure of regulatory agencies, except got rid of the thrift thing, which was -- since there were no thrift institutions left, it didn't make much difference.

But what is the result? We have five agencies who have some responsibility for financial markets. To get a coherent rule -- that's the Volcker rule and a lot of other rules -- you got to get agreement from five agencies. Have you ever tried to get agreement among give agencies for anything? I mean, they will disagree upon when we go on daylight saving time or something, right? And that is what's holding up the rule, as near I can see, is -- this has always been true. We've always had too many agencies around. But the complexity in the market today and the nature of the problems -- it doesn't make any sense, in my judgment, to have five competing agencies -- because inevitably they compete -- in the financial world.

Now, to give you another substantive area which they didn't touch, money market funds, which is not unrelated -- we had a breakdown in money market mutual funds of serious dimensions during the crisis. Money market -- I should keep repeating mutual funds, because that's what they theoretically are -- were originally -- it's regulatory arbitrage, pure and simple. Banks couldn't pay interest, so they developed a way. Well, that's no longer true.

But this thing is a hybrid -- and I'll use a polite word -- it's a hybrid. If it's a mutual fund, they should be marking to market. If it's really taking what's -- bank deposits, it should be regulated about -- like a bank. But it's not either. And they kind of get now to the traditional bowling ball in the canoe. (Laughter.) In a year or two ago, they went out and bought a lot of European paper, sovereign paper, bank paper in Europe. And then they go, oh, my God, Europe's having a crisis; well, pull it all back again. And this is trillions of dollars -- well, a trillion or 2 (trillion), yeah.

Everybody -- everybody -- the Treasury, the administration, Federal Reserve, FDIC, OCC, CFTC -- I'm not sure the SEC at present can agree upon anything -- but potentially, the OCC -- SEC -- but nothing gets done. And it was not covered in -- and you have a great consensus and you can't get it done.

And it's not -- it's not a horrendous thing. You could -- doesn't even take a law.

SORKIN: How much do you worry -- and I don't know if you do worry -- that Dodd-Frank and the Volcker rule have pushed some of the riskiest practices, as they say, into the shadows -- into the unregulated institutions?

VOLCKER: I don't -- I don't worry at all about all these traders that are going off in the shadows, because they're -- if they go bankrupt, they're going to go bankrupt. Nobody's talking about -- nobody should be talking about, anyway -- saving them. They're not operating on government support.

By and large, they've got much higher levels of capital than a commercial bank does. So in that sense, they're safer.

They're going -- these hedge funds are going out of business all the time without shaking the market in any sense. Now, in a big crisis, it would maybe be a little different. But I think we ought to -- banks are protected institutions, and I think we want to make a distinction between the protected institutions, which these days is a grant of a substantial subsidy --

SORKIN: Have you followed Brown-Vitter?

VOLCKER: Pardon?

SORKIN: Have you followed this whole Brown-Vitter debate and this bill about --

VOLCKER: Would that be the capital thing --

SORKIN: -- about raising capital?

VOLCKER: Well, I --

SORKIN: Does that make sense in this environment?

VOLCKER: Well, what makes sense -- I don't know what the details of -- there are. I think we should have a so-called leverage requirement or capital requirement on the total assets of the bank, which is the way, traditionally, we did it in the United States, and in fact we never dropped it entirely. But the Europeans have never liked it.

And this -- all this Basel arrangement, concentration, so-called risk adjustment -- trouble is, nobody can ever tell in advance what's risky and what isn't risky. The irony of the risk adjustment capital requirement, which was invented when I was -- it wasn't invented, but we agreed to adopt it internationally when I was still chairman.

And there's debate -- inevitably, it becomes a kind of a political tussle and a tussle between banks in different jurisdictions as to what's important -- which assets are important, which are not. But what it was left at that time, in so-called Basel I -- there were two things that either had no capital requirement or very low capital requirement: residential mortgages and sovereign debt. (Laughter.) What was the heart of the crisis when it appeared? Residential mortgages and sovereign debt.

Now they've spent 10 years trying to improve it, with Bill McDonough and others, never quite got it accepted in the United States and didn't prevent the crisis, obviously. So now it'll be very sophisticated and go back and do it over again -- and I'm not involved in this, but I know a lot of people that are involved in it -- think -- if you think Dodd-Frank is complicated, look at the new Basel rules for how you judge the riskiness of various assets. That doesn't mean you're going to abandon it, but the idea is, yes, we ought to put an overall -- forget about the risk; the whole bank ought to have a capital requirement of more than what they're talking about in Europe, and it seems to me that there ought to be a --

SORKIN: And you're not worried about -- just real quick, you're not worried about the -- I mean, one of the things that bankers will tell you today is if we increase capital requirements even more than we have already -- and the suggestion is that they think they've done enough and that they think they're much better than Europe, which is probably true at some level -- that it's going to hurt the economy in the short term. Do you buy that?

VOLCKER: No. (Laughter.) It may help it, you know?

SORKIN: It may help it because?

VOLCKER: The better people feel about the banks, the more confident the banks feel in their own future, the more willing they are to do the traditional kind of business that they're supposed to be doing -- and if it makes it more expensive to do trading -- oh, if you think I'm going to cry about that, you've got another thought coming.

SORKIN: OK. Final question, then we'll open it up. I was thinking about you a couple of weeks ago when Margaret Thatcher passed away, because I know she's an old pal. What would -- (laughter) -- what would she do now? What would she think of what's going on here in the United States, in this whole conversation that we're having?

VOLCKER: Well, I'm sure what her reaction would be is, how did you -- Ronnie, how did you ever get in this difficulty, or whoever the current Ronnie is. (Chuckles.) She would be -- I don't know what she'd do now. It's so much more complicated.

But she would have been unhappy about, I'm sure, the complexities and kind of wildness of the financial markets. What she would have done, I don't know. You know, she had -- I guess it says something about Margaret Thatcher. Once in a while, a visiting president or a prime minister or something would come to Washington, they'd want to talk to the head of the Federal Reserve. But you always -- you know -- (inaudible) -- see who in the hotel wherever you are, she always insisted upon coming to the Federal Reserve. She's the only one that I know of that made the point of coming to the Federal Reserve on several occasions. It was reflected in the fact she loved central bankers, except her own. (Laughter.) She was always complaining about -- and she'd say -- you know, she'd tell -- I hated this ????? poor Gordon Richardson we had here -- why don't you do what Fritz Leutwiler is doing, or why don't you do what the Germans are doing or whatever? But anyway, you know, she was very much a kind of monetarist in that sense. (Inaudible) -- control over the money supply, she wouldn't have known what to make -- (inaudible).

SORKIN: Thank you for that history. We're going to leave it there, but we're going to open this up right now. This gentleman in the second row has had a question. Before I -- when you do stand, please say your name, if you could. I'm trying to see if there's any other notes that I'm supposed to make sure that I tell you.

QUESTIONER: Thank you very much. I'm Allen Hyman, from Columbia Presbyterian Medical Center. We've been very lucky to have a ringside seat at the rather vicious duel between your alma mater Princeton and Harvard University about the best (tactics ?) to take, stimulus versus austerity, to solve our economic problems. How do you come out on this?

VOLCKER: Well, I come out with the appropriate mixture of austerity and expansion. What else can I say? (Chuckles.)

SORKIN: Elaborate.

VOLCKER: (Chuckles.) No, I -- you know, this is a balancing act. You -- look, what you can't avoid is the basic problem, that we had an overleveraged economy, not just in the United States but elsewhere, with big imbalances that have not yet been corrected and there's no magic solution to this by austerity or by liberal policies. So you're trying to do a careful balance.

And, you know, things are -- Europe is in enough trouble that, you know, you can understand the urge to take the foot off the brake a bit, anyway, even in Germany which is doing well but, you know, could do better. So that, I think, is pretty clear cut. That seems to be happening.

But any -- I don't know of any illusion that that is going to suddenly cure the European problem. You've got to get these weak countries, the Mediterranean companies (ph) financed. And there are limits to the amount of financing that comes if the financiers, which is another name for Germany, doesn't have some confidence that they're on a course that's going to restore some kind of equilibrium. So unless you have -- call it austerity or whatever you want to call it -- unless there's some sense that they're on that course, the thing isn't going to hold together. So that's the kind of game that's being played. And that doesn't mean they couldn't have more liberal policies than they've got now. But there are limits. I --

SORKIN: Yes, sir.

QUESTIONER: I'm Donald Shriver of Union Theological Seminary. As little as I may understand bankruptcy law, I cannot help but agree with David Grigger (sp) and Stephen Cutner (sp). There's something vastly unjust about keeping Chapter 11 from applying to underwater mortgage holders, and especially the group of people that my life has mostly been thrown with, namely students. What justification is there for Congress to say that student loans must be continued to be paid at 7 percent interest at a time when capital can be borrowed at 2 percent?

VOLCKER: I think it's a very difficult question. There may be some significance to the questions I'm getting from the medical profession or from the seminary. (Laughter.) We have problems that extend beyond economics.

I think the argument you get -- still get, is trying to kind of pick the winners and losers, in one sense, pick the people that have -- they're underwater on their mortgage, and it's a high rate, and they can't pay, and eventually you're going to end up, or at least a lot of them, in bankruptcy and that's not a very -- and it takes a long time and that's not a very happy result from anybody.

The objection you get from a kind of massive program to handle that in a big scale is what about the guy that's also paying 7 percent and didn't -- he did make 20 percent down. His mortgage is not underwater. You're expecting that guy to sit there and not have any relief while his wastrel neighbor is getting taken off the hook. So it becomes a kind of moral question.

If you did it for everybody, boy, that's a very big expense -- (chuckles) -- because the residential mortgage market is so big. And then you got all the moral hazard problem of they took on a fixed-rate mortgage and now you're going to relieve them all and when interest rates go up, they're never added to it. So it's not a good situation. There's no doubt about it.

And the administration tried to deal with it with a program that turned out to be pretty weak. Again, I think they found it difficult to separate the winners from the losers. They said, look, we can't afford to markdown all the mortgages in the country, but somebody that is really in the position that you describe, and he has some chance of coming out whole, we will subsidize his interest rate for a while. And if he behaves himself, we'll continue to subsidize it.

I think -- you know, it's had some affect, but it's not been big enough to deal with the situation that you described. And I don't have any better answer for you. Of course, the foreclosure power itself, which is one way of handling this, is -- it just is not a very speedy process. You could get -- you know, I'm just talking to the wind -- I mean, the result for the lender to the disclosure process, the loss ultimately involved is probably greater than if he negotiated the thing in the first place.

And why more of them don't do that is partly a mystery, partly just administrative complications, I think. That's what -- ideally, you know, there ought to be an agreement between the lender and the borrower.

SORKIN: OK. There's a question in the back that -- the lady in pink, shall I say.

QUESTIONER: I was looking forward to this all week. Thank you so much for being here. One question -- Jill. My name is Jill Otto from J.P. Morgan.

So I have a question about my generation and forward looking with your experience. I would like to know, you know, we, as millenials, have arguable gone through one of the worst crises since the Great Depression. And looking forward, what is your advice for my generation? You know, maybe things that you tell your kids or grandkids in terms of what we should be doing, you know, with our savings, with --

VOLCKER: That's an easy question.


VOLCKER: You ought to be disciplined -- (laughter) -- not be too attracted to go to Wall Street or make a lot of money in the short run, do good --

QUESTIONER: But in terms of our savings, I mean, we have the option to kind of, like, stash the cash, right, under our mattress, like this is sort of what we've learned from the crisis. Or -- you know, but that would kind of be, like, a fight the fed type of thing, like should we just --

VOLCKER: You're young enough so that this difficulty in making any money on your savings, I understand.

SORKIN: You can mix some history in now, yeah.


SORKIN: I said, you're about to mix some history in.

VOLCKER: Well, there's -- I don't know why I keep talking about this -- we went through 15 years of interest rates like this. But you're young enough so that's not going to last your whole lifetime. We get this all straightened out, just think of those real interest rates you're going to make in rising stock market and all the investment opportunities that will exist around the world. But you got to get the work operating right. So you got a big responsibility to help that happen.

I -- this is much too big a subject to even begin to talk about, but you look Europe. And you had, because it was convenient at the time, you had big imbalances grow between savers and the spenders. And the rubber band got stretched so far that eventually it collapsed. Now they're all in big trouble.

You could make a comparable statement, in my view -- not quite so evident, but it's there -- about the international system, beyond Europe. Why did we sit here and borrow so much money so easily from Russia -- not from Russia, from China, Japan, mostly Far Eastern places, trillions of dollars we borrowed at low interest rates, and what did we do with it? We pumped up our housing market -- that's the only way it was going to be absorbed -- to unsustainable heights.

Now, in my view, anyway, in a rational, disciplined international monetary system, that should not have been permitted to happen. But while it happened, there was no restraint. And it was nice. It was nice for the Chinese. They had some place to put their money, and they particularly wanted the exports. It was nice for us to have cheap imports and borrow money cheaply. Who's to worry?

Well, who's to worry was nobody, until the (clocks ?) came, because you don't have an institutional structure that fostered. That's what the whole debate about is in Europe now, how do you get a structure within Europe that provides the discipline within Europe so that that experience isn't repeated over again? And it's not so easy to make those arrangements within Europe, but it's a lot easier within Europe than it is for the world. But I really think this is a neglected subject.


QUESTIONER: Nick Brandt (sp) with Lazard (sp). I have a related question. It seems that the world's bond markets are discounting Armageddon, while the world's equity markets, at all-time highs, are discounting Nirvana. How do we reconcile this?

VOLCKER: You got to go above my pay grade, I guess is the answer to that. (Laughter.) But the fact that interest rates are so low, the lowness of the interest rates helps support the stock prices. So I'll go that far and say that's not (an irregular ?) arrangement, and if it's so cheap to borrow, you're going to get high -- should get high stock prices.

The mystery here to me -- I guess it's a mystery -- we're in the middle of this very difficult economic situation, wages are going nowhere, incomes of 90 percent of the population are going nowhere, and meanwhile, corporate earnings are at all-time highs relative to the economy. I -- you know, it's not the way the economy's supposed to work. And this is not a -- it's startling now that it happens right when we're still recovering from a big -- the big recession. But the sluggishness of earnings of the average worker, the average American, has now been going back 10 or 15 years.

So all the stuff that we all dutifully learned in Economics 101, that rising productivity lifts all incomes, hasn't worked for 15 years. And that's a kind of serious problem, I think. I guess people are wealthy enough, by and large, in the United States that, you know, they can still buy -- most people can buy what they need. Not everybody. A lot of food stamps and other things. But they're not in a revolutionary mood. But it really is a strange phenomena, where corporations are doing so well and the general public is doing so poorly, relatively.

SORKIN: Sir, right here.

QUESTIONER: Hi. Daniel Rose, Rose Associates. Paul, given the deplorable state of America's infrastructure nationally, given the low bond rates, given the degree of unemployment in the construction industry, doesn't logic seem to cry out for a massive infrastructure program of some sort?

VOLCKER: Don't you care about the deficit, Mr. Rose? (Laughter.) I am all in favor of an intelligent infrastructure thing, I think. I believe that we're not doing well on the infrastructure side.

This massive infrastructure program -- organizing such a program would take years, so it's not an answer to our immediate problem, as much as I would like to see more infrastructure. I think I could put on my public administration hat, where -- or if people want to talk about public administration. I saw a wonderful quotation, which I will recite to you, in the paper yesterday. But you talk about massive infrastructure programs, which we need. We need a mechanism or a method of management so we don't waste, we spend the infrastructure on the right things and it doesn't get diverted into relatively useful projects.

And, you know, (in one ?) man's opinion, I think we've got a couple of pretty -- very expensive, useful projects going on right now in New York City that probably would not stand up very well in some array of what priority infrastructure should be, and that becomes a very difficult political and administrative problem. There's some talk about it in investment bank, which may -- it should be examined. Is this a mechanism not so much to raise the money but to apply some discipline on who gets the money and what are the priorities for infrastructure spending, including things that aren't very glamorous, like sewers and water pipes and sewage disposal and so forth, on and on? What is this quotation, that the vision without implementation is a hallucination? Thomas Alva Edison. I believe that.


VOLCKER: We lack the implementation side.

SORKIN: Michelle.

QUESTIONER: Hi. Hi, Michelle Caruso Cabrera, CNBC. Do you wish CNBC has existed when you were Federal Reserve chairman so we could cover the size of your briefcase every time you walked in?

VOLCKER: Did I what?

QUESTIONER: Would -- do you wish CNBC -- I was joking; I'll ask a real question. The coverage that is so intense of the Federal Reserve decision every single time and the great publicity and the deep knowledge, comparatively, that the American public has now, compared to way back when, about of the role of the Federal Reserve -- a good thing, a bad thing?

VOLCKER: Well, I don't know. I believe in talking less but -- doing more and talking less, but that's -- (laughs). But sometimes I think, you know, this feeling about openness -- you've got to -- you know, the Federal Reserve's got to defend itself. It's got to have -- be accountable for what it does. It has to explain what it does. And there are plenty of vehicles for doing that.

But if you want to talk all the time, you know, the Federal Reserve is not an economic seminar, or it shouldn't be. It's an important responsibility where people have -- who have broad experience, in my view, can be brought to the table and reach some consensus about what to do and stick with it. And I don't know. You don't have to announce -- (inaudible) -- they do what they think is best. And I -- it is an odd thing. They worry all the time -- I will say -- about their communication problems. And the more talking they do, the more they worry about their communication problems, it seems to me. (Soft laughter.) That's -- maybe a little less talking might help the communication. But I -- (laughter).

Yes, ma'am.

SORKIN: Question, go ahead.

QUESTIONER: I'm Lucy Kohns (sp), sir. I'm a journalist. I was interested in your comment that there's a real problem in that working people have gotten much less out of -- out of the income distribution, and I wonder to what extent do you think that's caused by the -- both the corporate, anti-union system, the massive anti-union activities of corporations in the last 10, 20 years, and also in decisions by the government and Congress in refusing to raise the minimum wage. How would you think that working people could get their fair share of income development and increase in this country?

VOLCKER: Well, we're getting a long ways from central banking policy in those questions. (Chuckles.)

QUESTIONER: But you said --

VOLCKER: You know, you can play around with the minimum wage. And certainly these have not been happy years for unions. You've got a lot more competition, a lot more pressure on the manufacturing industry, where unions used to be strong and are not now strong. And the only places that unions are really strong now is in government, and that's coming under pressure now given the pressures on state and local governments.

SORKIN: Which side of the debate are you on this?


SORKIN: Which side of the debate on unions are you?

VOLCKER: I didn't know there's a debate on unions. I mean, I'm not against unions. But I don't know. I can't say let's have stronger unions and you turn and have stronger unions. That's part of a bigger economic problem, I think, including particularly the international competition that didn't exist before; it didn't exist to the same degree. And this is a problem not just in the United States, it's a problem elsewhere. It's -- the big -- I don't want to attribute everything to this this, but the big change kind of in union psychology was -- when I was in Washington -- I think Reagan was elected, and we had this controllers strike. It wasn't even about wages. It wasn't about wages at all. But he said, well, you go on strike, you're going to quit your job, and I'm going to hire new controllers unless you come back.

And I forget how long the union lasted -- the strike lasted, but the union lost. Somebody stood up to them and they lost. The government stood up to them. I think that had a pretty profound psychological effect on the whole union bargaining situation. That goes back, what, 30 years.

And -- I don't know. I don't know. I can't answer your question in a way that satisfies me, much less you. (Laughter.)

SORKIN: OK. All the way in the back. And the cheap seats are so cheap he doesn't even have a seat, he's standing.

QUESTIONER: My name Andrew Gundlach, Andrews and S. Bleichroeder. I have a question on the Fed balance sheet. And that is who is going to buy all of the government securities on that balance sheet? Who is going to replace the government as a purchaser in the markets? In other words, how are they going to exit? Or are these securities, and is this balance here with us until maturity or until forgiveness?

VOLCKER: Well, I don't know all the answers to your questions. But let me say I do not think it's beyond the wit of man and Fed Reserve to manage this situation in a way that, you know, will not create great problems in the market. Obviously, it cannot be done very rapidly, but it can be done -- conceptually it can be done. Practically I think it can be done. Politically can it be done?

The problem with central banking, in my humble opinion, is not this kind of technical question. It's whether restrictions, a move away from aggressive ease to some restriction in time -- and by in time, I mean -- (inaudible) -- use the old story about the take away the punch bowl before party gets too raucous because once the party gets raucous, you can't take it away without a kind of rebellion in the party. But it's never popular to start because by definition, you have to start before the economy is at full employment, before the economy is inflating, before the housing gets overbuilt or whatever the excess of the moment is. And you can be sure that there is going to be political resistance. And that's why you have a -- (chuckles) -- presumably an independent agency who will be far-sighted enough and disciplined enough so we'll deal with the situation at a time when the political environment may not be politically benign. And that's my answer to your question is my problem is a psychological one, not a -- not a technical one.

SORKIN: And you had a question.

QUESTIONER: Thank you. Laurie Garrett, from the council. Some three or four questions ago, you said, well, we haven't had a revolution -- (chuckles) -- in reference to the stagnation, even falling, in wages and real income for the middle class. And it's sort of a hallmark all across the world that we've seen since 2007 a widening in the wealth gap. First, do you perceive a wide margin wealth gap to be a threatening issue in the long run? And if so, can central banks play any kind of role in that?

VOLCKER: Well, I -- you know, my personal opinion is, this kind of tendency continuing is a big problem for social democracy and social policy in a democracy. I do think that -- do I think the central bank can do much about it? I -- central bank's already asked to do many things, and I don't think they're going to correct income imbalances in the economy. But -- they may be asked to do so, but I don't know how they'd do it.

It's a very deep-seated problem, I believe. It may be that events themselves are beginning to deal with it. It's not quite so easy to pay these enormous incomes to executives or traders or whatever, as it was a few years ago because the mood is some degree changing. But look, if I had an answer, I'd be out writing op-ed pieces or something -- a powerful thing, writing an op-ed piece. (Laughter.)

SORKIN: All the way in the back.

QUESTIONER: Hello. Andy Husa (ph), Rutgers Business School. A question about quantitative easing, just a high-level -- do you think it's a good idea? Do you believe that the costs and the -- in terms of fed independence being at risk or markets overheating --

VOLCKER: I'm sorry, what was the premise?

QUESTIONER: About quantitative easing.

VOLCKER: Oh, quantitative easing.

QUESTIONER: What's your take on it?

VOLCKER: Look, this is history. (Inaudible) -- not history, it's quantitative easing. (Laughter.) But -- I don't even like the term, but they are being very liberal. I think inevitably -- they've said themselves, the more you do this, the marginal impact it has is probably reduced. And they've done a lot of it. But there are believers that it has a significant influence in the short run, and if you're sitting down there under pressure to do something -- for all the reasons that have been suggested here, things are not satisfactory, what can we do? Well, that's the one tool they've got, and they're using it.

I don't think it's reached a point, as I just said, that they can't, with great skill and discipline, reverse it in time. I don't understand all that's going on down there. I stay away from Washington, but that's -- not completely -- I forget what the question was. Yeah, it's got, I think, decreasing influence.

SORKIN: Joe -- oh, go ahead, and then we'll --

QUESTIONER: Bhakti Mirchandani, Barclays. What's your view of the increasing indebtedness of the West on democracy, and how would you advise central bankers to think about it?


SORKIN: Do you want to repeat the question?

QUESTIONER: Sure. What's your view of the increasing indebtedness of Western economies on the level of democracy in those countries and how would you advise central bankers to think about that?

VOLCKER: Well, I've got views about the increased indebtedness; I didn't quite connect it up with democracy, but -- except with so much -- (inaudible) -- democracy that gives rise to the indebtedness -- (laughter) -- but I think we have -- I think it's been a kind of worldwide phenomena. There's been a lot of borrowing, certainly in the United States, but we were not alone -- there were a few exceptions.

And this led to a very difficult economic situation, and all I can say is that I hope this is recognized that this is a -- at least for the next 20, 30, 40 years, we're not going to repeat, and that we will be a little bit forewarned if indebtedness begins going up rapidly again. Right now it's not -- not in the United States, anyway. Government debt is, but not the private debt. So I hope we've kind of learned our lesson.

But I guess the problem is, you know, it's hard to deal with this in a democracy as fragmented as our democracy is. We started out talking about the ideological splits in Washington and what's going on. And we can't have a coherent fiscal policy or coherent other policies -- it isn't good for the economy, I'm sure of that. And it's not going to be good for, in the long run, our democracy. I think, you know, we've got a real problem down there. We've got a real problem in the country. We've had it before, but we've got to deal with it.

SORKIN: Let's see if we can sneak just maybe one or two more questions in. Joe Perella.

QUESTIONER: Given where you started, your first answer about Washington being paved over by high-rise office buildings occupied by lobbyists, given what you just said about democracy, do you think -- and then given the impasse and the inability to deal with the long list of problems America faces that we all know and hear about, do you think it's time to revive term limits?

VOLCKER: (Laughs.) Term limits. You know, the odd thing is -- I haven't got any particular position on this. I can see the arguments on both sides, but -- (inaudible) -- odd thing is that in my observation of Washington on the Senate and the House side, some of the -- (inaudible) -- called old war horses, but some of the most constructive kind of balanced members of the Congress are the people that had a number of terms -- just guys coming in fresh and charged full of ideology that create the difficulties, to oversimplify.

So -- on the other hand, I can recognize getting fresh blood. I'm going to leave that solution to you. (Laughter.) You know, one thing I can't help but say, because it's an old hobby horse of mine -- there's much too little attention paid to the effectiveness and efficiency of ordinary government operations. And it just is not a matter that attracts attention in universities. It doesn't attract attention in the public except when something goes wrong. Then they all say, oh, the government isn't operating right. And too often, that's true. It's not always true, but sometimes it's true.

But nobody pays attention to what you have to do to correct that. That's what I -- this quotation I gave, which you won't understand. But to me, it says: You need effective public administration. You can have all the big ideas about infrastructure or what to do about mortgages or any other thing. If you don't administer the program, you haven't got anything.

And our capacity for administration is not very good. I saw the -- this is trivial in the big order of things, but there -- I was reading in the paper about Penny Pritzker being named secretary of commerce. And they repeated all the comments that President Obama had made over the past year or two about the ineffectiveness of the commerce department and too many agencies overlapping and doing the same thing. It's true, but nobody does anything about it.

And so that's what I'm going to do. I'm going to take care of all that mess. (Laughter.)

SORKIN: OK. On that note, we're going to leave it there. Paul Volcker. Thank you very, very much. (Applause.) Thank you for some great questions.






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