Paul Volcker: Preventing Another Financial Crash

Former Federal Reserve Chairman Paul Volcker, a member of the Belfer Center International Council, has reached a stage of distinction in life in which he feels no compunction about telling the truth as he sees it -- even uncomfortable truths. Though he serves as chair of President Obama's Economic Recovery Advisory Board, Volcker spent the first year of the Obama administration as an evident outsider. Many of his provocative policy recommendations -- such as prohibiting commercial banks from engaging in high-risk trading activities -- did not get much traction.

All that changed in January when President Obama not only endorsed Volcker's recommendations about banks' proprietary trading, but even named it the "Volcker rule." Taking Volcker's advice, Obama threw his weight behind prohibiting banks from owning, investing in, or sponsoring hedge funds or private equity funds. At the White House announcement of the new proposal, Obama said he "deeply appreciates" Volcker's counsel in dealing with a broad array of economic challenges.

Volcker subsequently testified before the Senate Banking Committee on his proposal. He emphasized that it would affect only a handful of banks -- four or five in the U.S., and "perhaps a couple of dozen worldwide."

"Hedge funds, private equity funds, and trading activities unrelated to customer needs and continuing banking relationships should stand on their own, without the subsidies implied by public support for depository institutions," Volcker said.

Volcker has been a long-term advocate for financial reform and a clear-eyed observer of the Fed --of which he was the legendary chair.

He does not hesitate to speak his mind. Among his comments during the crisis:

• In support of a proprietary trading ban: "I don't want my taxpayer money going to support somebody's proprietary trading."

• To a group of bankers in London: "Wake up, gentlemen. Your response, I can only say, has been inadequate."

• On financial innovation: "I wish somebody would give me some shred of evidence linking financial innovation with a benefit to the economy."

• The only financial innovation that has improved society? The ATM.

Volcker is a highly regarded contributor to both Belfer Center and Harvard Kennedy School events. In the past year, Volcker has met several times with the Center community and made a candid public presentation at the John F. Kennedy Jr. Forum (see the video at www.iop.harvard.edu). At the Forum, Volcker encouraged students to consider other careers outside of financial services.

"I wish the business schools and others would somehow try to inculcate in students the challenge of a nonfinancial world," Volcker said. "Making things -- taking that technology and producing something real -- can be as much a challenge, or more, as making a million dollars in the financial market.

As the Financial Times tells it, there may be another reason for Congress to adopt the Volcker rule: at 6 feet 7 inches, Volcker is simply too big to fail.