Volker on Financial Crisis
Former Federal Reserve chairman Paul Volker had some interesting comments on the current financial crisis on last night’s Charlie Rose show. The headline is his musing over whether loan guarantees and other “extreme measures” are a proper role for the Fed rather than the federal government. His commentary on the global nature of the problem, though, is more interesting to me:
Rose: Tell me about how you see the relationship of the U.S. economy to the global economy. And is it changing?
Volcker: Here we have this factor entering into this domestic crisis that inevitably is international … because foreign institutions have invested in these American securities, but the world, as a whole, has been dependent upon the dollar. And you know it hurts my feelings, if nothing else, that the Swiss franc is worth more than the dollar.
Rose: Does it hurt your feelings that the Euro’s worth more than the dollar?
Volcker: Well, no, the Euro was sort of born more than the dollar.
Rose: Has [the economy] bottomed out, or have we seen the worst?
Volcker: Look. The basic economy is not irretrievably damaged in any way, shape, or form. We had to go through an adjustment, which is tough. It’s happening much quicker. You’d rather have it happen gradually. But I’m optimistic that, okay, we’ve got to get the consumption down, we got to get spending in line with our capacity to produce. I think that’s going on. And that process is going to take a while. If we can stabilize the financial market, we ought to come out of this. Then we’ve got a lot of work to do about what we do with the regulatory system, the supervisory system, what the role of the Federal Reserve is, what the role of the Treasury and the government is, because this is a different financial market.
This strikes me as quite reasonable. We’ve got something of a feeding frenzy going on that’s causing some gross overreaction. Some companies are over-leveraged and some firms and individuals made some bad investments thinking the economy would keep expanding forever. But, fundamentally, we’ve got enormous human capital and there’s no reason to think this downturn is anything but temporary.
The strength of the Euro means that, for the first time in decades, there’s a viable alternative to the dollar for foreign investors. But, credit addiction or no, the American economy is younger, more dynamic, and a better bet.