Amid the willful historical revisionism and general nitwittery of Washington and the 2012 campaign trail, two true financial heroes were on display Wednesday, courtesy of my (more enlightened than most) employer, Atlantic Media. One hero was the much-vilified Ben Bernanke, whose tenure as Fed chairman gets a long overdue reassessment by Roger Lowenstein on the cover of this month's Atlantic. Bernanke is every Right-winger's favorite inflation wimp, and every Liberal's favorite symbol of unaccountable government. But what Lowenstein says is true: in the end this soft-spoken Southerner almost single-handedly saved the American and world economies from another Great Depression, despite taking a long time to realize the depth and systemic nature of the crisis. What Bernanke did in revolutionizing the Fed's crisis response, vindicating his work as a scholar of the Depression, dwarfed anything done on the fiscal side, as I wrote in an article for Newsweek in 2008.
The other hero is Paul Volcker, the legendary inflation hawk who told a crowd at a daylong Atlantic forum on the economy--organized by my friend Steve Clemons-- that the many sins of Wall Street have not yet been corrected. "We are in an environment of wealth-financed resistance to change," Volcker said.
Few people remember that it was Volcker, in his last term as Fed chairman in the 1980s, who had stood against too much financial deregulation. As I detail in Capital Offense:
"In February of 1987, shortly before the end of his term, the big Wall Street banks made the latest in a series of bids to unwind Glass-Steagall. The Glass-Steagall law had come under continual pressure as traditional commercial banks sought to follow their old clients into the capital markets, issuing stocks and bonds. Innovators like JP Morgan had gone global while the law still reigned at home, becoming big in the Euromarkets. At a hearing room in Washington, in one of his last acts as chairman, Volcker listened skeptically as Thomas Theobald, the vice chairman of Citicorp, argued that “the world has changed a hell of a lot” since the ‘30s. Volcker worried aloud that without Glass-Steagall, lenders would begin recklessly lowering loan standards in order to win more contracts for public offerings of their borrowers’ stock. He said that banks might start marketing bad loans to an unsuspecting public."
Two decades later, after the crash, it was Volcker who pushed hard against a reluctant Barack Obama -- and his small-minded but large-egoed economic advisor, Larry Summers--to get them to re-impose just a taste of Glass-Steagall, a rule that would separate federally insured bank deposits from risky behavior. This became known as the "Volcker Rule." Against Summers' advice, Obama finally embraced the idea--a year later--but it is now getting riddled with loopholes. (In a brief chat at the conference, Volcker told me he still thinks it will "work.")
In the aftermath of the financial crisis, returning to the same theme he had embraced two decades before, Volcker questioned the wonders of "financial innovation." Beyond the ATM, Volcker asked at a conference two years ago, what new banking products had really added to economic growth? Exhibit one for this argument was derivatives, trillions of dollars in “side bets” placed by Wall Street traders. “I wish somebody would give me some shred of neutral evidence about the relationship between financial innovation recently and the growth of the economy,” he barked.
And at the conference on Wednesday, Volcker clearly sounded this tocsin once again. The 90s and 2000s, he said, "were brilliant years for Wall Street but were they brilliant years for the American economy?" No, they weren't, he noted. Average households had no increase in income in those years. "Financial innovation cannot solve real problems... If there's anything we've had enough of it's financial innovation."
Volcker was to be followed at the conference by Larry Summers, who opposed his efforts on Wall Street after a dubious career as a financial deregulator in the '90s. I won't be staying for that session.