The Current Financial Crisis |

The Current Financial Crisis

20111110_Paul_Volcker_05w170The recent collapse of U.S. brokerage MF Global serves as a warning against excessive risk-taking, former Federal Reserve Chairman Paul Volcker said, referring to the U.S. firm that filed for bankruptcy after risky bets on debt from troubled euro zone states scared away clients and investors.

Dr Volcker, who stepped down as Chairman of U.S. President Barack Obama’s Economic Recovery Advisory Board in January, was speaking at a dialogue session organised by the Lee Kuan Yew School of Public Policy on 9 November. 

He said MF Global’s bankruptcy supported the case for more financial regulation in the U.S. and suggested that the Singapore authorities do the same. 

“In my view, (banks) should not take part in speculative activity … I would like to see that rule adopted in Singapore and right around the world,” Dr Volcker said, adding that such speculative activity had played a key role in the 2008 financial crisis.

Dr Volcker said he would like to see the Volcker Rule — which is due to come into force next year in the United States as part of the Dodd-Frank financial reform bill — implemented across the world.

But the rule, which aims to prevent American banks from making big bets on markets with their own money or from backing private equity and hedge funds, was criticised by the man whose name backs the new regulation as being “much more complicated than I would like to see.”

The crux of such legislation is that governments should avoid bailing out big institutions and putting taxpayers at risk, Dr Volcker argued, adding that it was better to liquidate failed financial institutions so that they could continue to meet their obligations and not upset the market. What was in question, he said, was the political will of governments to enforce such action when “push comes to shove”.

He blamed financial industry lobbyists for making the proposed regulation much more complex than it needed to be. “There is no set of lobbyists in the United States bigger, more important, and more rewarded than the financial lobbyists,” he said.

Asked by the dialogue session’s moderator, Professor Kishore Mahbubani, Dean of the LKY School, what was the way out of the euro zone debt crisis, Dr Volcker said that apart from the recapitalisation of vulnerable banks, Spain and Italy will need to continue to borrow heavily for a while, and that European Union authorities need to step up assistance for countries who need to borrow. 

“If that can continue for a year, enough confidence would have emerged so that markets will themselves be in a position to provide the funds,” he said.

Dr Volcker added that though in some cases such as Greece debt relief may be necessary, banks may need to be allowed to fail and some countries may have to go into quasi-default.

Asked whether Europe has the resources to solve its problems, Dr Volcker said: “They have the resources in Europe to get it done. Or they go to the rest of the world for funds. The rest of the world has a big stake in this. Europe as a whole can manage it, but can it manage it? They all have their own political problems.”

Turning to the United States, Dr Volcker lamented that although policymakers knew that raising taxes would produce positive results for the economy, this was not happening because of the unprecedented “deep ideological divisions” between the current administration and the right-wing Republican opposition.

Asked if the United States had fallen into a liquidity trap like Japan did in the 1990s, Dr Volcker said: “We are all caught in a higher debt trap. That’s the problem with Greece, Spain, Italy, Portugal and Ireland. It’s not a very happy situation.” He added that the Japanese experience, which saw a bust in the real-estate and stock markets at the same time, provided a valuable lesson for the U.S. policymakers as it showed that restoring growth too slowly will result in prolonged unemployment and hardship.

On China, Dr. Volcker noted that it had become a force in the world economy, and at no time in history had a country of its size grown 10 per cent a year.

He said: “The emerging world is now as big as the developed world and that is the phenomenon of the last decade and requires a change in thinking. China is out there and wants to have a say in the affairs of the world. In probably 12 to 15 years, its economy will be as big as the U.S., and it will be a different world politically and a different world economically.”

In that new world, Dr Volcker believed China will be more preoccupied with its own internal affairs but will be called upon to shoulder more responsibilities as a rising power. In light of this, China cannot continue to run big current account surpluses at the expense of other nations. In line with other advanced economies, China will in future need to raise its consumption as a percentage of GDP to 50 or 60 per cent, from 35 per cent currently, Dr Volcker said.

Dr Volcker had a few words to say about his profession, too. Economists, he felt, had become too wound up in producing highly sophisticated Mathematical models so much so that some of their work in forecasting was unwarranted. “An economic system is not a physical system”, and unlike the physical world, human behaviour does not comply with distribution curves, he said, crediting the use of psychology in the work of the winners of this year’s Nobel Prize for Economics.

Asked by a member of the floor if he had any advice for the Singapore civil service, Dr Volcker gave a surprising reply that drew laughter from the audience: “My understanding is that civil servants in this city-state are extremely well paid. I approve of that. It’s unusual. You have a reputation of running a clean, efficient civil service. That is an advantage. It doesn’t exist in the U.S.”

Emphasising the importance of good public policy, Dr Volcker said great policies that are not well administered will ultimately come to naught, and hence there will always be demand for an institution like the LKY School which has made “remarkable progress” in understanding the problems and complexities of administration.


By Benjamin Tan, Editor of Global-is-Asian, the quarterly magazine of the LKY School.


Paul Volcker is undoubtedly one of the most influential voices on global financial issues. President Obama describes him as “one of America’s most promising economic minds”, while Princeton economist Alan S. Blinder says, “If you play free association with the name Paul Volcker, two words come up, integrity and steadfastness.”

Paul Volcker served as the Chairman of the Board of Governors of the U.S. Federal Reserve System from 1979 to 1987, and is one of the world’s most authoritative figures in international economics and finance. First appointed when the U.S. was facing double-digit inflation, Volcker gained widespread respect for his achievements as the legendary central banker who had the moral strength to stick to tough economic policies in order to attain his goal of curbing inflation.

Paul Volcker has also served as the Chairman of U.S. President’s Economic Recovery Advisory Board. He was appointed a member of the Governing Board of the Lee Kuan Yew School of Public Policy on 1 April 2006.

Paul Volcker also spoke to Claire Leow, senior manager for research and dissemination, on the role the school can play in these uncertain times:

Volcker notes the power shift to China, and a need to understand China better:

“There are tectonic changes where China is in this tremendous growth period. The US is over-spending and over-indebted. We grew up in a world where US was dominant and we thought it was a good thing. We tended to have constructive policies, such as promoting free and open trade, and the main beneficiary has been in Asia and less the US.

It’s a period of reflection of the American leadership but that leadership has to play a role in a world of more equal participants. China is going to play a role in a world but act more in China’s interest or it may do things less constructively.

While China has a lot of money and will go around and buy raw materials, it is still quite restricted. For Europe, China will be providing liquidity to help to do the things they should be doing. Where is the quid pro quo? 

Volcker, who sits on the board of the LKY School, has this exhortation for LKY School and schools of public policy:

I am a great advocate of schools of public policy because effective public administration has gone out of fashion, and is considered dull and uninteresting. Part of the problem of poor government is that it is not well administered. 

We are struggling with a feeling that most people are keen on the next big idea, that it is glamourous, and leave the problems of administration to other people.

The School has to focus on teaching effective administration so that whatever policy is decided on, it will effectively administered. Big ideas without execution are symptomatic of our times.

I encourage the LKY School of Public Policy to draw attention to the problems of administration.


By Claire Leow, a senior manager at the Research Support Unit, and managing editor of Global-is-Asian.


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Dr. Paul Volcker, Former Chairman of US President's Economic Recovery Advisory Board; Former Chairman of the US Federal Reserve

Wednesday, 09 November 2011
5.30 p.m. - 7.00 p.m.

Suntec Singapore International Convention & Exhibition Centre,
Ballroom 2, Level 2
1 Raffles Boulevard Suntec City
Singapore 03959

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