grimmeissen
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Join Date: 1/14/2004
Posts: 1217
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Posted: 4/9/2008 11:57:15 AM
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 Paul Volcker was the Federal Reserve Chairman from 1978-1987. When he achieved his position in 1978, the United States economy was in turmoil, the dollar was in a crisis, and inflation was running through the roof. Since World War 2, the United States government and the Fed engaged in a period of massive monetary growth, eventually leading to Nixon ending the dollar's attachment to gold. While this led to periods of strong economic growth, it also set the stage for a major failure down the road due to rapidly rising prices as had not been seen since Lincoln used the first paper money during the Civil War. The Fed leaders before Volcker always used lower interest rates and rapid growth of the money supply to stave of recessions, yet every time they acted, inflation would shoot up. It was a deadly cycle: threat of recession, massive inflation, threat of bigger recession, even more inflation.
Volcker stepped in and put an immediate stop to the chaos, leaving a legacy of himself as the "savior of the dollar." Interest rates were raised to astronomical levels, sometimes reaching upwards of 20%. This action was radical, as it caused a very deep recession, however, Volcker did not waiver. Within two years the dollar had recovered, inflation subsided, and we began the longest period of economic growth in American history, only interrupted by small setbacks in the early 90s and the .COM bust in the late 90s.
Following the market downturn in 2001, the Federal Reserve under the direction of Alan Greenspan, once again went back to the old 1960s-1970s well. To offset a looming recession, they increased the money supply and lowered interest rates aggressively, kicking off the housing boom and bust that we are now dealing with. In response to the housing bubble bursting, the Fed under the direction of Ben Bernanke, is once again fighting fires with gasoline. Interest rates are decreasing, the money supply increasing, and the Fed is opening radical new bailout windows to banks and investment firms.
The dollar's original savior is now at it again, this time criticizing the current Fed for not being able to do what he achieved. Also, he is not happy with the Fed's recent moves to bailout investment firms and shore up bad mortgage paper, calling it an effort to "extend to the very edge of its lawful and implied powers."
In a speech to the Economic Club of New York, Volcker commented on the Bear Stearns bailout by saying "what appears to be in substance a direct transfer of mortgage and mortgage-backed securities of questionable pedigree from an investment bank to the Federal Reserve seems to test the time-honored central bank mantra in time of crisis: lend freely at high rates against good collateral; test it to the point of no return."
"The extension of lending directly to non-banking financial institutions--while under the authority of nominally `temporary' emergency powers--will surely be interpreted as an implied promise of similar action in times of future turmoil," he said.
Volcker is clearly not approving of the policy actions the Federal Reserve and the US Government are using to prop up banks and investors who made the bad decisions that got us to where we are. He feels that this is overstepping the implied powers of the Fed and is setting up a system where these "emergency" powers can be abused regularly down the road.
So who does Paul Volcker blame for the current credit turmoil? He later said in his speech that regulators and market participants allowed "excesses of subprime mortgages" to turn into "the mother of all crises." He added that "there was no pressure for change, not in Washington which was spending money and keeping taxes low, not on Wall Street which was wallowing in money, not on Main Street with individuals enjoying easy credit and rising house prices."
The way I see it, the system has failed. The Federal Reserve, the supposed protector of dollar purchasing power, has allowed credit to expand beyond our capabilities to maintain. The government has shown over the past 20 years to have absolutely no fiscal restraint, spending money whenever and wherever it chooses, and cutting taxes while masking the rapid rise in the hidden inflation tax. What the United States needs is a brand new Paul Volcker. Someone who will step in and slam the breaks on the economy and stop the dollar printing presses that are starting to burn up from overuse. While this might cause a deep recession as was seen in the early 80s, it is a necessary pain to erase the greed and stupidity of our current leadership.
As Milton Friedman said in his classic book Money Mischief, inflation is like alcohol addiction. When the government starts inflating, the original results are positive, just as someone who originally embarks on a drinking binge receives positive feelings. The next morning, the alcoholic wakes up with his hangover, just as an inflated economy does once the bubble begins to burst. Oftentimes an alcoholic will treat his hangover with more of the poison that got him where he is, just as an inflation-addicted government tries to fight the impending doom with yet more inflation. The only method for an alcoholic to rid himself of his dependence is to bite the bullet, suffer from extreme withdrawal, and finally come out on the other side in a much better situation.
It's time for the US economy to be cleansed of its addiction. While the withdrawal symptoms will be severe, there is beauty on the other side.
Note: The Paul Volcker quotes came from this Bloomberg article.
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mccracken
VIP Member
Join Date: 1/16/2004
Posts: 262
Location: USA
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Posted: 4/28/2008 12:17:29 PM
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People are all about short term economics.
GE has a policy of devoting half of it's resources to taking care of today's goals and half towards tomorrows. This past quarter was the first time they've missed in a decade. I think if America took a similar stance they'd be doing a lot better.
Then again, the government isn't accountable to anyone, so they don't have to. =)
Check it out.. check it out... and then pick it out....... Then show me my dinero!!!
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grimmeissen
Administrator
Join Date: 1/14/2004
Posts: 1217
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Posted: 4/28/2008 1:13:23 PM
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GE really surprised me with this quarter. One reason they haven't missed in a long time is because they set their own guidance. They are usually spot-on with their guidance and The Street has never had reason to doubt.
They missed VERY badly this quarter, from guidance they set not too long ago. So obviously things got really bad in a quick amount of time, particularly in their financial wing.
As for the original subject, you are right. Corporate America has made it a habit of just trying to "beat" the numbers this quarter. They sacrifice the future bigtime in order to accomplish tiny goals now. This has created a culture where they have to dig ever deeper into new vehicles such as credit derrivatives in order to "top" last year's results. That house of cards is falling in the financial industry.
Take a look at the US Bank conference call from last quarter. It's interesting to hear comments from a bank who didn't get caught up in the mess and did plan for the long-term while all of their competitors were supposedly passing them up with increasing profits. They talk about taking tons of market share right now because they actually have capital and customers are running to them because they are perceived as "safe."
http://seekingalpha.com/article/72414-u-s-bancorp-q1-2008-earnings-call-transcript?page=-1
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mccracken
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Join Date: 1/16/2004
Posts: 262
Location: USA
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Posted: 5/3/2008 9:45:23 PM
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Long term goals generally spell results in business.
One thing that's intersting, though, about GE is that they cut co-ops from 200 to 40.
They also cut part cost take out engineers by 40%, which surprises me, because each PCTO engineer averages 1 million a year.
Then again they also are partial slaves to the short term economic system.
Check it out.. check it out... and then pick it out....... Then show me my dinero!!!
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grimmeissen
Administrator
Join Date: 1/14/2004
Posts: 1217
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Posted: 5/4/2008 9:47:28 PM
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GE will come back. They are too big and are generally well-run. It did surprise me how hard they got hit, though. Even GE, with their massive, international business couldn't eat through the credit mess.
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