Government and corruption

Has a grownup finally shown up?

Paul Volcker dropped a bombshell on Friday. The importance of his pronouncement is less economic than political. It appears to indicate a serious rift between him and the Administration.  A post by Larry Doyle provides some details and analysis of the economics. Here is an extract from Doyle’s piece:

Mr. Volcker takes on the White House and Congress with his proposal. We know Volcker is no favorite of Larry Summers. Knowing the explosiveness of his proposal, Volcker is not bashful in addressing the discomfort his proposal would create for the Washington insiders who are in Wall Street’s pocket. The WSJ sheds further light on this point:

Mr. Volcker said he would appear before Congress next week to discuss his views in more detail. A Treasury Department spokesman declined to comment.
Asked after his speech if his comments represent a break with the White House’s proposal, he replied: “Nothing I said today should be a surprise” to the administration.

In the future, this announcement may viewed as the beginning of the end of Obama’s presidency. While other factors will certainly play roles, the importance of this event is easily overlooked. The event’s importance derives as much from the messenger as it does the implications of the message. It is the first shot fired from a highly qualified and credible figure, who also happens to be on the Obama team. First some background on the messenger, and then an explanation as to why Friday might be so important.
Paul Volcker and Warren Buffet were early supporters of Obama. They appeared often during the campaign and were widely represented as his economic advisers. After the election Volcker was appointed to a titular position as Chairman of a new economic committee with no power, seemingly no purpose and little reason to meet. Whether Volcker and Buffet still support Obama is unknown, but both men seem removed from the president. Buffet’s move was probably by choice, while Volker seems to have been exiled.
Paul Volcker is not one to take lightly. He combines brains, gravitas, integrity and courage. He is an icon of Central Banking. He literally walked softly and carried a big stick in the late 1970′s. As Chairman of the Federal Reserve he faced the worst inflation in our country’s history (save possibly the Civil and Revolutionary Wars). Economic experts believed it would take a decade or more to tame inflation. He stopped it overnight, despite the political uproar over the unavoidable recession. Recent administration economic policies are so foreign to Volker’s economic thinking and methods as likely to be abhorrent to him. He knows the oligarchy that is Washington and Wall Street and clearly disapproves. While Volcker’s standing in history is established, to be associated (in an entirely passive role) with the economic debacle that is being imposed on this country cannot set well. As a proud and capable man, the manner in which he was used as a political prop and figurehead is likely to be even more disturbing.
Does Volcker’s apparent break represent a tipping point for the Obama administration? It might in the sense that it was a the-emperor-has-no-clothes moment.  On Friday, he confronted the administration, directly challenging their philosphy regarding the regulation of the banking industry. Less appreciated was the indirect challenge to the philosophy of government which goes to the heart of Obama’s declining popularity. Implicit in Volcker’s talk were questions regarding the proper role of government and corruption, the primary motivating forces behind recent protests. The perceived corrupt partnership between Washington and Wall Street is believed by most on Main Street. Volcker seems to provide support this perception. His great reputation and the fact that he is/was an Obama guy only adds to the potential political ramifications.
Will other business and/or political figures follow Volcker’s lead and speak out?  While Volcker cannot be hurt at this stage, it will take extreme courage for the next critic. The fear and reality of government retribution is an enormous deterrent, yet Volcker has provided some “cover.”  As the damage of the Administration’s policies become more apparent, it is likely that others will follow. Not only on banking regulation but in other areas as well. Once this criticism starts, a snowball effect is likely, and another failed presidency will occur sooner rather than later.