Interview with US Economic Recovery Advisory Board Chair Paul Volcker: America Must 'Reassert Stability and Leadership'
Part 2: 'We Have Gotten a Wake-Up Call'
The financial crisis has led to a decline in American economic supremacy. Here, two traders taking a break on Wall Street in March.
Volcker: The challenge is real. That is the kind of threat that we want to deal with and reassert stability and leadership. I grew up in an environment in which the United States was leading, was a pole of strength.
SPIEGEL: At that time, America was the biggest exporter in the world and not the biggest importer. The America you are referring to was the biggest lender in the world and not its biggest borrower.
Volcker: That is correct. And we don't perhaps have to get all the way back there, but we have to get back in an area where there is confidence in the stability and the authority of the United States. I think we can do that but we have a challenge, we have gotten a wake-up call. There is concern in our recovery advisory group about how to rebuild the competitiveness of the United States, which inevitably means rebuilding, in part, the manufacturing sector of the economy.
SPIEGEL: What part of the manufacturing sector do you envision?
Volcker: I think there are a lot of opportunities in the so-called green economy for taking leadership. On the technical side, I mean technology development, research development, the US is doing ok, but when it comes to manufacturing some of this stuff, somehow the Germans do it all!
SPIEGEL: And a lot of Americans try to blame the Germans for this, saying that we are depending too heavily on the export industry.
Volcker: I must say, I admire Germany in this situation even with its high costs. In some ways, I think the labor cost is higher in Germany than it is in the United States but you can somehow maintain that export edge. You are dedicated to exporting, we are dedicated to financial engineering and it hasn't worked out too well. I wish we had fewer financial engineers and more mechanical engineers. Tell me the secret of how the Germans keep this going.
SPIEGEL: Maybe the reason is that the Germans don't trust the American boom and bust economy with its dedication to fast money.
Volcker: I think part of it is the psychological. The young, ambitious Germans realize that export industry and heavy engineering is the German competitive advantage. The best Americans don't even think about that. We have the Silicon Valley and that whole kind of high tech industry is still our strength but we need something broader than that too.
SPIEGEL: Outsourcing and off-shoring have been the key words of the last decades. You don't think that the times of "made in America" are over forever?
Volcker: That has been the mentality and we have to change that somehow. I think it's self-correcting in part. The glamour of going to Wall Street is not as great today as it was a few years ago.
SPIEGEL: Are you sure? The Wall Street businesses are doing well. The big bonuses are back.
Volcker: It's amazing how quickly some people want to forget about the trouble and go back to business as usual. We face a real challenge in dealing with that feeling that the crisis is over. The need for reform is obviously not over. It's hard to deny that we need some forward looking financial reform.
SPIEGEL: In Germany, the government, but also the Bundesbank, is still waiting for a clear American approach toward that goal.
Volcker: I grew up in a world in which American leadership was important and, I thought, constructive. It's more difficult now because we are not as relatively strong as we used to be. If you are right in saying that somebody is waiting for our voice, I hope we can speak clearly.
SPIEGEL: You have been clear about your ideas. Do you really believe we have to break up the big banks in order to create a more sustainable financial system?
Volcker: Well, breaking them up is difficult. I would prefer to say, let's just slice them up. I don't want them to get heavily involved in capital market activities so my view is: Hedge funds, no. Equity funds, no. Proprietary trading, no. Trading in commodities, no. And that in itself would reduce the size of the big banks. So you get some reduction in size. Equally important, you make them more manageable and easier to deal with if they do get in trouble.
SPIEGEL: Banking should become boring again?
Volcker: Banking will never be boring. Banking is a risky business. They are going to have plenty of activity. They can do underwriting. They can do securitization. They can do a lot of lending. They can do merger and acquisition advice. They can do investment management. These are all client activities. What I don't want them doing is piling on top of that risky capital market business. That also leads to conflicts of interest.
SPIEGEL: But the American government seems to have lost some eagerness in setting a tougher regime of rules and regulations to control Wall Street. Everything is being watered down. Why?
Volcker: I will do the best I can to fight any tendency to water it down. What we need is broad international consensus to make things happen.
SPIEGEL: Your old German friend, the former Chancellor Helmut Schmidt, is already on your side. He is now speaking about the current economic system as a kind of predator capitalism which must be tamed.
Volcker: I'm glad he is speaking out. I am a great admirer of Helmut Schmidt. He was very straightforward and kind of brutally outspoken in a way, to which many people reacted adversely.
SPIEGEL: Are you thinking of a particular situation?
Volcker: The famous incident happened in 1979 shortly after I became Chairman of the Federal Reserve Bank…
SPIEGEL: …and the inflation in the US had reached 12 percent.
Volcker: I was flying with the Secretary of Treasury to a meeting in Belgrade but for some reason an arrangement had been made, Helmut probably suggested it, that we stop in Hamburg on the way to Belgrade to hold a meeting. The meeting was mostly Helmut speaking for an hour about how "you Americans" have got to do something about inflation. My Secretary of Treasury was kind of taken back by the force of it all, but it was fine with me since I had been planning the same kind of policy.
SPIEGEL: During your tenure as chairman of the Federal Reserve, the bank was always part of the solution. Today with the Fed's policy of easy money, many experts see it as part of the problem.
Volcker: Given the difficulty of the economic situation and the large amount of money being spent to support the economy, The Fed is receiving the brunt of the criticism. Some support for the economy was certainly necessary, but the mere fact that in this situation emergency measures were necessary should not dictate a liberal approach in the future.
SPIEGEL: Lawmakers on Capitol Hill are thinking about tougher controls over the Federal Reserve.
Volcker: I think the loss of independence and authority of the Federal Reserve would be a very serious matter for the United States. Not just in terms of monetary policy but in terms of our place in the world. People look to strong, credible institutions and I think the Federal Reserve has been such an institution. If that's lost or too hamstrung by legislation I think we will regret it.
SPIEGEL: But is the Fed still the same kind of institution as during your tenure as chairman? Or is it now more of a governmental instrument? The Fed is managing the TARP program and is also buying government bonds.
Volcker: In some sense the Federal Reserve is always an instrument of the government. It is a government body but it is independent within government. But you are right in the sense that part of the concern is that they have involved themselves quantitatively in entering markets and in that process, you are supporting some markets and not others. That is an area in which the Federal Reserve has never wanted to get into and one that most central banks don't want to get into. If you are going to maintain your independence you have to avoid that. To intervene in particular sectors of the market is not the proper role for the central bank over time. It could be justified only by extreme emergency.
SPIEGEL: So what do you expect in the very near future?
Volcker: As an American, I have to be an optimist. But we have got a big challenge and we have to face up to it. And as you know, there is a lot of concern about the dysfunction of the political system.
SPIEGEL: So it is becoming harder to be an optimist?
Volcker: It's a challenge.
SPIEGEL: Mr. Volcker, thank you very much for this conversation.
Interview conducted by Gabor Steingart and Thomas Schulz
- Part 1: America Must 'Reassert Stability and Leadership'
- Part 2: 'We Have Gotten a Wake-Up Call'
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