The Difficulty of Ben Bernanke’s Job Today:
Paul Volcker believes that Ben Bernanke’s job is easier than his own was in 1980 because the Federal Reserve now has the power to create business expansion, which was not the case during Volcker’s tenure. However, Bernanke faces the challenge of dealing with economic imbalances beyond the Fed’s control, such as inherited debt, a decimated manufacturing industry, and external imbalances.

The Risk of Inflation:
Volcker does not believe that inflation is imminent, as the current economic environment is not conducive to it. However, he acknowledges that inflation could become a problem in the future if the economy gains momentum and liquidity remains high.

The Independence of the Federal Reserve:
Volcker reflects on the historical relationship between the Fed chairman and the president, noting that communication between the two has varied. He recalls a period in the 1930s and 1940s when interest rates were held artificially low, raising questions about the Fed’s independence. Volcker emphasizes that the Fed’s close cooperation with the Treasury during the recent financial crisis was necessary and does not reflect a lack of independence. However, he expresses concern about the Fed’s current broad range of actions, which go beyond traditional central banking policy and raise questions about how the Fed will retreat from these measures in the future.

Mortgage Market Reconstruction:
Paul Volcker expressed concern about the government’s dominance in the mortgage market, emphasizing the need to reshape it and reduce reliance on government intervention. He proposed eliminating hybrid institutions like Fannie Mae and Freddie Mac and establishing a government agency specifically for intervention when necessary. Volcker advocated for a variety of mortgage instruments, including shorter-term and adjustable-rate mortgages, to make them more attractive to banks and create a sustainable mortgage market. He cited Canada as an example of a successful mortgage market largely dominated by institutional banks, providing a stable source of income.

Political Changes:
Volcker noted the significant changes in Washington since his time in government in the 1970s. He highlighted the lack of modern luxury hotels and restaurants in Washington back then, indicating a less affluent and developed city. In contrast, present-day Washington is characterized by modern amenities and a much larger population, reflecting its growth and transformation.

The Growth of Lobbying:
Over the past several decades, lobbying has become a thriving industry in Washington, D.C., leading to the construction of numerous office buildings and hotels catering to lobbyists. This surge in lobbying activity has made it more challenging to govern effectively, as it influences policy decisions and makes it harder to reach bipartisan agreements.

The Bowles-Simpson Plan:
A grand bargain similar to the Bowles-Simpson plan, which aimed to reduce the deficit through a combination of tax increases and spending cuts, could have potentially passed 30 years ago. The tax side of the plan, which involved eliminating various exceptions and exemptions and reducing tax rates, was implemented in 1986. However, the plan did not address entitlements in a comprehensive manner, relying primarily on income taxes for deficit reduction.

The Need for Consumption Taxes:
Volcker believes that the U.S. should consider implementing consumption taxes to address the challenges of fiscal sustainability and address issues such as global warming and carbon emissions. He suggests a carbon tax as a potential option, expressing a preference for taxes over cap-and-trade mechanisms. Consumption taxes could provide a more sustainable source of revenue compared to income taxes and help balance the budget in a shorter timeframe.

Reform of the Corporate Income Tax:
Volcker emphasizes the need to reform the corporate income tax, citing its current complexities and inefficiencies. He believes that substantial reform of the corporate income tax is necessary to improve its effectiveness and fairness.

Conclusion:
Volcker highlights the significant influence of lobbying in Washington and its impact on governance. He emphasizes the need for a balanced approach to deficit reduction, including consideration of consumption taxes and reform of the corporate income tax. Volcker stresses the urgency of addressing fiscal sustainability and the potential to combine fiscal and social objectives through policy measures.

The Volcker Rule and Glass-Steagall:
Volcker disagrees with the notion that the repeal of Glass-Steagall led to the 2008 financial crisis. Investment banks, free from Glass-Steagall restrictions, significantly contributed to the housing market bubble and the crisis. Glass-Steagall’s prohibition on specific investment banking activities by banks had lost its significance over time.

The Volcker Rule’s Scope and Limitations:
The Volcker Rule addresses trading activities by banks, prohibiting proprietary trading and limiting proprietary investments. Volcker believes the Volcker Rule does not go far enough in addressing systemic risks and other aspects of financial regulation. Other measures, such as capital requirements, regulation of too-big-to-fail institutions, and derivatives trading, are necessary alongside the Volcker Rule.

Dodd-Frank’s Shortcomings and Areas for Improvement:
Dodd-Frank, which includes the Volcker Rule, does not fully resolve all financial risks and problems. Volcker suggests that the legislation should be shorter and clearer, with a focus on specific areas. One significant gap in Dodd-Frank is the lack of reform in the structure of regulatory agencies, due to political concerns.

Problems with Dodd-Frank:
Dodd-Frank failed to address the underlying structural issues with financial regulation. It left intact the complex and fragmented regulatory landscape, with multiple agencies responsible for overseeing financial markets, leading to disagreements and delays in rulemaking. The Volcker rule, among others, requires agreement from five agencies, making it difficult to implement coherent regulations.

Money Market Funds:
Money market mutual funds, which experienced a breakdown during the crisis, are a hybrid regulatory arbitrage that should either be regulated like banks or marked to the market like mutual funds. Their recent purchase of European sovereign and bank paper, which was subsequently withdrawn during the European crisis, highlights the need for better regulation.

Regulatory Inaction:
Despite consensus on the need for action, the US government has failed to address the regulatory gaps, even when solutions do not require new legislation. The Volcker rule and Dodd-Frank have inadvertently pushed risky practices into unregulated institutions, which may pose a systemic risk in a major crisis.

Systemic Risk from Shadow Banking:
Volcker downplays the risks posed by shadow banking, arguing that these institutions have higher capital requirements and can fail without destabilizing the market. He believes that banks, as protected institutions, should be distinguished from shadow banks and subject to stricter regulation.

Capital Requirements:
Volcker supports a leverage requirement or capital requirement on the total assets of banks, as opposed to the risk-weighted capital requirements proposed in the Brown-Vitter bill.

Capital Requirements and Risk Assessment:
Volcker criticizes the risk-adjusted capital requirement system, known as Basel I, which was implemented during his tenure as chairman. He highlights the irony that residential mortgages and sovereign debt, which had no or low capital requirements, were at the heart of the financial crisis. Volcker suggests that the new Basel rules for assessing asset riskiness are overly complicated and may not be effective in preventing future crises.

Margaret Thatcher’s Views on Monetary Policy:
Volcker recalls Margaret Thatcher’s visits to the Federal Reserve during her time as Prime Minister of the United Kingdom. He notes that Thatcher was a monetarist who emphasized controlling the money supply. Volcker believes that Thatcher would have been unhappy with the complexities and volatility of modern financial markets.

Austerity vs. Expansion in Economic Recovery:
Volcker emphasizes the need for a balanced approach, combining austerity and expansionary measures, to address economic problems. He recognizes the over-leveraged nature of the global economy and the imbalances that need to be corrected. Volcker cautions against excessive austerity, particularly in Europe, as it could hinder economic recovery. He stresses the importance of financing weak countries, such as those in the Mediterranean, to restore equilibrium.

Moral and Practical Challenges of Adjusting Mortgage Debt:
Paul Volcker acknowledges the unfairness of excluding underwater mortgage holders and students from Chapter 11 bankruptcy protection. Adjusting mortgage debt raises moral questions about fairness to those who have paid their debts responsibly and the potential for moral hazard. A large-scale program to adjust mortgage debt would be very expensive and could have negative consequences for the economy.

The Obama Administration’s Attempt to Address Underwater Mortgages:
The Obama administration implemented a program to subsidize interest rates for underwater homeowners who were at risk of foreclosure, but it was not sufficient to address the scale of the problem. Foreclosure is a slow and costly process, and lenders are often reluctant to negotiate with borrowers.

Advice for Millennials:
Millennials should be disciplined and focus on long-term goals rather than short-term gains. Millennials should not be discouraged by low interest rates, as they are likely to rise in the future, providing opportunities for investment and growth. Millennials have a responsibility to help create a world where economic imbalances are addressed and responsible economic policies are implemented.

The Global Imbalances:
Paul Volcker discusses the global economic imbalances that led to the financial crisis. He highlights the excessive borrowing by the United States from countries like China and Japan. This borrowing fueled unsustainable housing market growth in the United States.

The Lack of Discipline:
Volcker emphasizes the lack of discipline in the international monetary system. He argues that a rational and disciplined system should have prevented such imbalances from occurring. This lack of discipline contributed to the eventual collapse of the housing market and the financial crisis.

The Consequences:
Volcker points to the negative consequences of these imbalances. He notes that wages and incomes for the majority of the population have stagnated. In contrast, corporate earnings have reached all-time highs, creating a paradoxical situation where corporations thrive while the average person struggles.

The Disconnect Between Bond and Equity Markets:
Volcker addresses the apparent disconnect between bond and equity markets. He observes that low-interest rates, a result of the imbalances, have supported high stock prices. This phenomenon contradicts traditional economic principles and raises questions about the sustainability of current market conditions.

Infrastructure and Unemployment:
Volcker responds to a question about investing in infrastructure to address unemployment in the construction industry. He acknowledges the need for infrastructure improvements but cautions against massive programs without proper planning. He emphasizes the importance of efficient management to ensure that infrastructure investments are directed towards worthwhile projects.

Volcker’s Critique of Infrastructure Spending:
Paul Volcker criticizes some ongoing infrastructure projects in New York City for their questionable cost-effectiveness. He emphasizes the need for a disciplined approach to infrastructure spending, prioritizing less glamorous projects such as sewers and water pipes.

Volcker’s Opinion on Federal Reserve Communication:
Volcker expresses his preference for action over excessive talking, particularly in the context of Federal Reserve decisions. He believes the Federal Reserve should focus on its responsibilities and reach consensus without constant public announcements. Volcker suggests that excessive communication may worsen the Fed’s communication problems.

Volcker’s Perspective on Income Inequality:
Volcker acknowledges the significant decline in the share of income received by working people. He points to corporate anti-union activities and the government’s refusal to raise the minimum wage as potential contributing factors. Volcker does not offer specific solutions but highlights the need for working people to receive a fair share of income growth.

Unions:
Volcker emphasizes that unions have faced challenges due to globalization and increased competition, leading to a decline in their strength and influence. He mentions the significance of the controller strike during Reagan’s presidency, where the government’s stance against the strike had a profound psychological impact on union bargaining.

Central Bank Balance Sheet:
In response to a question about who will replace the government as a purchaser of government securities on the Fed’s balance sheet, Volcker expresses confidence in the Federal Reserve’s ability to manage the situation without causing significant market disruptions. He highlights the importance of taking restrictive measures before the economy reaches full employment or experiences excessive inflation.

Wealth Inequality:
Volcker acknowledges the growing wealth gap as a significant issue for social democracy and democracy. He doubts the ability of central banks to directly address income imbalances but recognizes that events themselves may influence the situation.

Quantitative Easing:
Volcker views quantitative easing as a historical tool with potentially diminishing marginal impact. He believes that central banks have used it as a response to economic pressures but emphasizes the need for skill and discipline in reversing it in time.

Increasing Indebtedness and Democracy:
Volcker expresses concern about the increasing indebtedness of Western economies and its potential implications for democracy. He observes that the phenomenon of excessive borrowing has been prevalent worldwide and requires careful consideration.

The Economic Situation:
After a period of economic difficulty, Paul Volcker hopes that the United States and other countries have learned their lesson and will avoid repeating past mistakes, particularly in terms of excessive indebtedness.

Challenges in Governance:
Volcker highlights the ideological divisions in Washington and the resulting inability to formulate coherent fiscal and other policies. He emphasizes that this is detrimental to the economy and democracy.

Term Limits:
When asked about reviving term limits to address the impasse in dealing with various problems, Volcker expresses mixed feelings. He acknowledges the arguments for both sides but points out that experienced members of Congress often bring balance and constructiveness.

Effectiveness of Government Operations:
Volcker criticizes the lack of attention paid to the efficiency and effectiveness of ordinary government operations. He stresses the importance of effective public administration for the successful implementation of policies.

Inefficiencies in Government Agencies:
Volcker cites the example of the Commerce Department, highlighting its perceived ineffectiveness and duplication of efforts with other agencies. He emphasizes the need for addressing these issues to improve government performance.