Introduction:
Paul Volcker, a Princeton graduate and former colleague of the speaker, is being introduced as a distinguished individual who represents Princeton’s motto of service to the nation and beyond.

Princeton Ties:
Volcker has close connections to George Washington University through scholarships and graduate fellowships. Princeton highly regards him as an exemplary embodiment of their motto, “Princeton in the Nation’s Service.”

Government Service:
Volcker worked in the federal government for nearly 30 years, holding significant positions such as Chairman of the Board of Governors of the Federal Reserve System and Undersecretary of the Treasury for Monetary Affairs.

Economic Navigation:
During his tenure as Chairman of the Federal Reserve, Volcker successfully guided the organization and the nation through a period of economic turbulence, including high levels of inflation. He is widely credited with ending the high inflation of the 1970s.

Post-Federal Reserve Career:
After retiring from the Federal Reserve, Volcker held leadership positions in the private sector, including Chairman of Wolfensohn and Company.

Commission Leadership:
Volcker has served as the chair of various prominent commissions, such as the Independent Committee of Eminent Persons investigating dormant Holocaust victim accounts in Swiss banks and the board of trustees of the International Accounting Standards Board.

Recognition:
Volcker is highly regarded for his contributions to economic policy and financial regulation, both domestically and internationally.

Background:
Paul Volcker, former Federal Reserve Chairman and Chairman of the Board of Trustees of the Group of 30 and the Trilateral Commission, discusses the Federal Reserve’s role in financial regulation.

Volcker’s Alliance:
In 2013, Volcker launched the Volcker Alliance, a nonpartisan organization focused on catalyzing new thinking and action related to federal, state, and local government in the United States.

Volcker’s Remarks:
Volcker emphasizes the importance of human behavior in economic decision-making, stating that “behavioral economics” is about “human beings involved.”

Federal Reserve’s Role:
Volcker highlights the Federal Reserve’s role as a bank regulator and its involvement in financial regulation.

Syracuse Debate:
Volcker mentions attending a debate on behavioral economics in Syracuse, where he spoke about the significance of human behavior in economics.

Volcker’s Key Points:
Alice Rivlin emphasized that avoiding financial crises is now the central bank’s main job, which was the original intent of the Federal Reserve. Volcker strongly believes that the Federal Reserve bears significant responsibility for ensuring financial stability. The current regulatory system is outdated, with inconsistencies, overlaps, gaps, and lax oversight. Despite numerous attempts at reform, no significant changes have been made to the financial system. Volcker and his new Volcker Assembly are tackling this issue, inspired by recent proposals from the Paulson Treasury and the Bipartisan Policy Center. Dodd-Frank made some changes, but a comprehensive overhaul was rejected.

Challenges and Frustrations:
Not everyone agrees with Volcker’s belief in the Federal Reserve’s responsibility for financial stability. Academic economics often overlooks the importance of financial markets. The current regulatory system is universally criticized, but attempts to reform it have failed.

Volcker’s Determination:
Despite the challenges, Volcker refuses to accept that nothing can be done about the financial system. He believes the time is ripe for action and is working with the Volcker Assembly to address this issue.

Shifting Landscape of the Financial System:
The financial system has undergone a significant transformation, with shadow banking now accounting for approximately 70% of the total financial landscape, while traditional commercial banking has declined to around 30%. The regulatory focus has primarily been on commercial banking, neglecting the expanding and less regulated shadow banking sector.

Rise of Enormous Financial Institutions:
Individual financial institutions have grown to enormous sizes, leading to concerns about their manageability and potential systemic risks. The rapid expansion of banks, from restrictions on interstate banking just two decades ago to nationwide banking, has contributed to the growth of these large institutions.

Compensation Practices and Fiduciary Responsibility:
Compensation practices in the financial sector have challenged the traditional concept of fiduciary responsibility, prioritizing short-term financial gains over long-term stability. This compensation structure creates incentives for excessive risk-taking and undermines the duty to act in the best interests of clients and stakeholders.

Overlapping Regulatory Turf and Political Influences:
The regulatory landscape is fragmented, with multiple agencies vying for authority and protecting their turf, leading to a lack of coordinated oversight. Political considerations and lobbying efforts further complicate the regulatory process, hindering effective reforms.

Recommendations for Comprehensive Reforms:
The Alliance for a Just Society has conducted extensive research and consultations to develop recommendations for financial reforms. The primary focus is to avoid concentrating banking and financial supervision solely in one organization, even the Federal Reserve. Centralizing economic and political power in a single entity raises concerns about the preservation of democratic principles and constitutional traditions.

The Role of the Treasury:
The Treasury represents political authority and broad economic policy. Treasury’s involvement is crucial during crises, requiring cooperation, participation, and leadership. FSOC and the Office of Financial Research were established to formalize Treasury’s role. Criticism exists regarding the Treasury’s involvement and authority. Treasury should be involved but not in charge of the regulatory process.

Role of Agencies:
Agencies are responsible for supervision and have expertise in their respective areas. Clearer definition of individual and collective responsibilities is needed. Overlaps, lapses, inconsistencies, and dispersion of checks need to be addressed. Building a strong supervisory staff with adequate pay and independent financing is crucial.

Role of Small Banks:
The issue of special relief for small banks is complex and potentially dangerous. Expanding relief to small banks can lead to a slippery slope. Careful consideration is required before making exceptions. The Volcker Rule should be applied to all banks, regardless of size.

Mortgage Market and Insurance Business:
The mortgage market is currently government-controlled. A privately run mortgage market is desirable but requires political consideration. The insurance business is not a central issue for regulatory reform.

Current Congressional Hearings:
Ongoing congressional hearings on financial regulatory reform focus on minor aspects. Piecemeal changes may weaken regulation and supervision. Comprehensive legislation is needed to address systemic issues.

Challenges and Opportunities:
The political climate is not conducive to major legislation, but it is a challenge worth pursuing. A well-crafted legislation can avoid ideological divisions and achieve success. The failures of regulation and supervision in the financial crisis provide a framework for reform.

Conclusion:
Financial regulation needs to adapt to the changing nature of financial markets. Enhanced supervision of non-bank financial institutions is necessary. The Treasury should be involved but not in charge of the regulatory process. Comprehensive legislation is needed to address systemic issues and prevent future crises.

Background and Need for Oversight:
Paul Volcker emphasizes the urgent need for adequate surveillance and oversight of the broader financial system, including non-traditional banking institutions. The Dodd-Frank Act created the Financial Stability Oversight Council (FSOC) and the Office of Financial Research (OFR) to address this need.

Reforming FSOC and OFR:
Volcker suggests modifying the current FSOC and OFR arrangements to enhance their effectiveness. He proposes that the Treasury Secretary remains the FSOC chair but without voting power to ensure impartial decision-making. Volcker envisions FSOC’s role as a check against other agencies’ decisions and a consultative and oversight body.

Unified Supervision and Regulation:
Volcker advocates for unifying supervision under a single agency connected to the Federal Reserve. He proposes separating supervision from regulation, with the Federal Reserve handling regulation and the unified agency managing supervision. This division aims to streamline supervisory functions and concentrate regulatory authority within the Federal Reserve.

SEC’s Role in Supervision:
Volcker emphasizes the need to address the SEC’s limited role in supervising broker-dealers, which include prominent financial institutions. He proposes transferring supervisory authority over broker-dealers from the SEC to the unified supervisory agency.

Strengthening the SEC:
Volcker suggests bolstering the SEC’s capacity and effectiveness in its core functions. He recommends combining the SEC with the Commodity Futures Trading Commission (CFTC) to enhance its capabilities.

Volcker Report Overview:
Paul Volcker highlights the need for a comprehensive report addressing the regulation of the financial industry. The report aims to strengthen supervision and investor protection, encompassing the responsibilities of the CFTC and the SEC. It seeks to generate a regulatory structure that is more coherent and effective in light of recent events.

Central Bank Supervision and Delegation:
Volcker emphasizes the importance of a strong central bank position with delegated supervision. He cites the UK model as an example, where the central bank maintains a strong link to supervision and market conduct. This structure ensures a comprehensive and coordinated regulatory approach.

Lessons from International Models:
Volcker acknowledges that most countries’ regulatory models are not directly applicable due to differences in market size and international significance. He believes that there is limited value in drawing lessons from their experiences.

Volcker Rule and Compliance Industry:
The Volcker Rule, known for its impact on Dodd-Frank, has generated a significant industry for compliance officers, consultants, and lobbyists. Volcker expresses curiosity about the amount of money being made in consultancies related to the Volcker Rule. He ponders whether he would have modified the rule if he had known about the extent of this industry.

Problems with the Volcker Rule Implementation:
The Volcker Rule’s implementation took an extended period, around four to five years, highlighting the weaknesses of the Financial Stability Oversight Council (FSOC) and the multi-agency regulatory system. The lengthy rulemaking process allowed ample time for lobbying and consulting, resulting in delays in the effective date of the regulation. Lobbyists exploit the regulatory process by seeking favorable outcomes for their clients, perpetuating a system where influence and personal connections hold sway. The lack of clarity and reliance on principles, rather than specific rules, exacerbates the regulatory complexities and uncertainties.

Critique of the Regulatory System:
Paul Volcker criticizes the current regulatory system, emphasizing the need for clear and concise rules instead of relying solely on principles. He draws a comparison between international accounting practices, which emphasize principles, and the American approach, which favors detailed rules. Volcker highlights the role of lobbyists and lawyers in shaping the regulatory landscape, suggesting that their actions prioritize personal interests over the broader public good.

Volcker’s Perspective on the Volcker Rule:
Volcker expresses disappointment with the final version of the Volcker Rule, stating that it deviated from his initial intentions. He acknowledges the challenges in implementing such a complex regulation and the influence of various stakeholders, including accountants and lawyers, in shaping the outcome.

Conclusion:
Volcker’s critique of the Volcker Rule implementation and the regulatory system underscores the need for reforms to address inefficiencies, reduce lobbying influence, and enhance the clarity and effectiveness of regulations.

Federal Reserve’s Truth in Lending Regulation:
Paul Volcker, former Chairman of the Federal Reserve, simplified the Truth in Lending Regulation from over 200 pages to 100 pages to make it more understandable. Despite his efforts, bankers’ comments led to more complexity, resulting in a potential return to the original length of the regulation.

Volcker Rule and Wall Street Culture:
Bart Naylor, representing Public Citizen, highlights the public’s support for the Volcker Rule and a simple separation of banks from proprietary trading. Naylor mentions New York Fed President Dudley’s proposal for senior banker pay deferral as a penalty for bank violations.

Volcker’s Views on Modern Management Practices:
Volcker criticizes modern management practices that solely focus on profitability, leading to a lack of genuine relationships and fiduciary responsibility. He emphasizes the impersonal nature of big investment banks, where bonuses are determined by computer-generated data rather than personal judgment.

Challenges in Ameliorating Negative Behavior Patterns:
Volcker acknowledges the difficulty in devising schemes to mitigate the impact of negative behavior patterns in the financial world. He cites the British as being more aggressive in addressing these issues.

Tri-Mandate of the Federal Reserve:
Volcker highlights the tri-mandate of the Federal Reserve, which includes maximum employment, stable prices, and moderate interest rates. He emphasizes the importance of financial stability, which was an implied purpose of the Federal Reserve Act of 1914.

Challenges in Avoiding Financial Crises:
Paul Volcker emphasized the difficulty in avoiding financial crises due to human behavior and the cumulative nature of market reactions. He highlighted the influence of “animal spirits” and the impact of housing market dynamics on financial stability.

Importance of Banking System Stability:
Volcker expressed his previous belief that maintaining the stability of the banking system was sufficient to prevent financial crises. However, the growth and complexity of financial institutions have made this approach insufficient.

Regulatory Arbitrage and Systemic Risk:
Volcker criticized the regulatory arbitrage and escape practices of certain institutions that avoid proper oversight as banks or mutual funds. He emphasized the need to address regulatory weaknesses exposed during the financial crisis.

FSOC Authority and Federal Reserve’s Role:
Volcker proposed granting the Federal Reserve the principal regulatory initiative in financial oversight. The Federal Reserve would exercise surveillance over the entire system, while the Office of Financial Research (OFR) would focus on system oversight rather than statistical analysis. FSOC’s authority would be determined, allowing it to review and potentially remand regulations issued by the Federal Reserve.

Political Implications and Persuading Congress:
Volcker acknowledged the political challenges in implementing his proposals, particularly in convincing current regulators and Congress to consolidate the financial oversight system. He recognized that regulators are concerned about potential losses in their authority and the complexity of merging different agencies. The key to persuasion lies in educating Congress about the systemic risks and inefficiencies of the current system.

Volcker’s Perspective on Financial Regulation:
Paul Volcker believes that the current financial regulatory system needs to be improved, particularly in terms of coordination and policy coherence. He emphasizes the need for unification to achieve better coordination, suggesting that the creation of a new organization with representatives from various regulatory bodies could be a solution. Volcker acknowledges that such changes may face resistance from existing regulatory agencies, but he believes that the benefits could ultimately outweigh the challenges.

The Significance of Recent Events:
Volcker highlights the recent financial crisis as a stark demonstration of the need for improved coordination and policymaking. He stresses that the complexity and interconnectedness of the financial system demand a more unified approach to regulation.

Volcker’s Assessment of Dodd-Frank:
While acknowledging that the Dodd-Frank Act was a step in the right direction, Volcker believes that it needs further refinement and improvement. He specifically mentions the Systemically Important Financial Institutions (SIFIs) and the Office of Financial Research (OFR) as areas where adjustments could be made to enhance their effectiveness.

Importance of Substance Over Political Rhetoric:
Volcker emphasizes the importance of focusing on substance and meaningful reforms rather than getting caught up in extraneous issues and political rhetoric. He criticizes the Tea Party’s approach to financial regulation, stating that it often distracts from addressing the core issues.

Volcker’s Role in Establishing Scholarships at GW:
Volcker expresses gratitude for the scholarships established in his name at George Washington University, which aim to support individuals pursuing careers in public service and financial regulation. He acknowledges the significance of these scholarships in promoting the values of reform and responsible financial regulation.