Tue 15 Apr 2008
Video: Paul Volcker on the “mother of all crises”
Posted by Prieur du Plessis under Money, Markets, Investment
The video clips below are must-see material recorded during former Fed chairman Paul Volcker’s address of last week to the Economic Club of New York on the credit crises and related matters.
Volcker, who headed up the Fed from 1979 to 1987, said the credit crisis is the “mother of all crises” and the modern financial system has “failed the test of the market-place”.
“The transient causes of extreme leveraging have been exposed by force of circumstance. The nation’s spending and consumption are being brought into line with our capacity to produce,” said Volker.
“The Federal Reserve has judged it necessary to take actions that extend to the very edge of its lawful and implied powers, transcending in the process certain long-embedded Central Banking principles and practices … 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.”
When asked about the possibility of a dollar crisis, Mr. Volcker retorted, “Dollar crisis … you don’t have to predict it, you’re in it … Let me remind you that the dollar after all is a fiat currency backed only by the word and policies of our government, policies exemplified by an independent Central Bank committed to maintaining price stability.”
Please click the images below for the views of arguably the greatest ever Fed chairman.
Please click on the following links for the rest of Volcker’s speech: Part 2, Part 3, Part 4 and Part 5.
Hat tip: RemiG2006
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April 16th, 2008 at 6:19 pm
The basic problem with US situation:
1. The non-recourse mortgage loans allow borrowers to walk away from their obligations essentially without worry. 2.Interest-deductability on mortgages encourages homebuyers to buy larger homes which are more costly and inefficient to run and discourages homeowners from paying off their mortgages.
3.Aggressive mortgage re-fi’s with loose credit underwriting.
4.Loan syndication which adds layers to the administration of mortgages, whereby people may not be able to easily renegotiate the terms of their mortgage if they find themselves in trouble since the mortgage has been sold into a syndicate and is serviced by an entity other than the originator and may cause difficulty in reviewing individual scenarios.
Eliminate ‘non-recourse’ loans and you eliminate easy credit underwriting and hence the need to syndicate the loan(in other words not have to dump the garbage onto someone else’s lap!). You create the moral force that compels people to pay their debts and therefore manage their money or face bankruptcy with the problems that causes individuals.
Eliminate interest write-off and you increase tax revenues which the gov’t needs and create housing efficiencies by better use of ’scarce resources’ - money.
This solution will not help the current situation but would mitigate future events from spiralling out of control - ie crazy consumer spending on discretionaries - which has warped the spending/savings habits of average American.
THe next shoe to drop is a $1 to $2 trillion bail out of home owners. Why? 10% of current US mortgages are >100% loan to value and according to NBER could go to as high as 20% of existing mortgages >100% loan to value by year end. The total res. mortgage debt o/s is approx $10 trillion.
Add that to existing National Debt and wave bye-bye to U$ unless int. rates go up per Volcker, (which is not happening this time.)