James Pethokoukis

Politics and policy from inside Washington

Verily, Volcker avers VAT is in the vicinity

Apr 7, 2010 14:57 UTC

Reuters has the scoop:

The United States should consider raising taxes to help bring deficits under control and may need to consider a European-style value-added tax, White House adviser Paul Volcker said on Tuesday.

Volcker, answering a question from the audience at a New York Historical Society event, said the value-added tax “was not as toxic an idea” as it has been in the past and also said a carbon or other energy-related tax may become necessary.

Though he acknowledged that both were still unpopular ideas, he said getting entitlement costs and the U.S. budget deficit under control may require such moves. “If at the end of the day we need to raise taxes, we should raise taxes,” he said.

Me:  It would be tough to find a think-tank economist or policymaker who doesn’t believe a VAT is on its way as part of a strategy to raise taxes.  (As I wrote earlier this week.) And not just on the rich. On the broad middle class.  But it is no magic bullet.  A VAT can be tricky to implement and could merely fuel more government spending. This will be a major political battle. I don’t see how it happens without a financial crisis as a spur. At the very least, a VAT would have to replace much of the current tax system and accompany major entitlement reform. Where to begin!?

COMMENT

This will make the nuclear wars look like middle class kindergarten.

Posted by Ghandiolfini | Report as abusive

The Volcker Rule: It’s not happening

Feb 16, 2010 19:07 UTC

A few points:

1) The much-hyped Volcker Rule proposal is failing fast in the U.S. Congress. But Paul Volcker himself probably isn’t that surprised. The former Federal Reserve chairman joked he was “just a photo op” even after President Barack Obama’s public embrace of his proposal to limit bank proprietary trading. More evidence that the moment for sweeping reform has probably passed.

2) The hope for any reform at all rests with the U.S. Senate’s new negotiating tag-team of Democrat Chris Dodd, chairman of the Banking committee, and Republican freshman Bob Corker. But Corker says the Volcker Rule isn’t going to be a “major topic” for discussion. And that is probably OK with much of the committee. As one banking industry lobbyist told me, “There is just not a lot of appetite among members of the minority or the majority to add [bank trading limits]. So I just don’t think you’re going to see it.”

3) Increasingly, the Volcker Rule looks more stunt than viable solution. Though Volcker had been pushing it for months, White House advocacy surprised both the Banking committee and banking industry. A poor way to introduce serious legislation in Washington. Lame-duck Dodd, who sees reform as his legacy, hears the clock ticking. A bill not passed by early summer is probably dead for the rest of this election year. His view: The Volcker Rule is a sudden and unwelcome complication.

4) Cynics saw it as a populist, knee-jerk response to the loss of a Massachusetts U.S. Senate seat held by Democrats for more than a half century. Even some Volcker Rule advocates admitted the plan didn’t directly address the regulatory failures that contributed to America’s financial meltdown. And although the proposal was introduced in January with great fanfare by Obama – Volcker standing prominently at his side – Senate Democrats say the creation of a new consumer finance regulator is actually the issue the White House is spending political capital on.

5) It is a reality that highlights the Obama administration’s scant interest in more extreme measures to limit the size of the banking sector or its activities. And if Volcker did harbor any small doubts about that, he shouldn’t any more.

COMMENT

Paul Volcker is the last Chairman of the FOMC with some integrity, overview and guts.

Office holders after Volcker are not worth mentioning as they contributed to the embarrassing mess in this nation’s commercial, financial and “human” environment…. claiming they could not see it coming.

I am surprised that Paul Volcker is willing to put up his hand for some broad outlines of a vague, populist proposal to limit bank proprietary trading…. possibly the least damaging of potential issues to create havoc in any bank – big or small.

The banks too big to fail have grown bigger since March 2008, well assisted by the former and current government while lending to small and medium seized businesses is on the back-burner… otherwise management of these banks would have lost the plot.

And America is suffering while they are financing the banks’ certain bets to short term prosperity when buying treasuries yielding 100 to 400 bps while having a cost close to zero.

Should the Obama-fanatics wish to rein in some buffers to off-set future losses (or the current ones not yet booked due to mark-to-myth rather than mark-to market principles) a simple, easy to administer and control method is to tax say 75% of the margin from the treasury trades or to establish a reserve calculated the same way which cannot be included in the capital adequacy ratios of any bank until dissolved.

But hey, such measure is possible too simple or is it too simplistic for the Wizards of Washington to embark upon.

The stern, precise and non-wavering Volcker when “whipping” markets with a sustainable interest rate policy, thereby avoiding bubbles and excessive, non-productive rubbish, is now siding with a president very similar to the former in terms of anomalies and extremes … maybe somewhat different in nature but distinct contrary to the Volcker doctrine that I learned to respect.

Sad. Really sad.

Posted by Finn Henriksen | Report as abusive

Paul Volcker: Obama’s forgotten man

Oct 21, 2009 13:42 UTC

The most devastating part of the NYTimes piece on Paul Volcker’s lack of influence on WH economic policy comes into the very last sentence of the piece:

So Mr. Volcker scoffs at the reports that he is losing clout. “I did not have influence to start with,” he said.

Me: I can’t believe Volcker is also too thrilled with what’s been happening lately with King Dollar. Yet the focus of the story is how the WH is ignoring Volcker’s advice to separate banking from investing and trading, a de facto restoration of the 1933 Glass-Steagall Act.

Mr. Volcker’s proposal would roll back the nation’s commercial banks to an earlier era, when they were restricted to commercial banking and prohibited from engaging in risky Wall Street activities. … The only viable solution, in the Volcker view, is to break up the giants. JPMorgan Chase would have to give up the trading operations acquired from Bear Stearns. Bank of America and Merrill Lynch would go back to being separate companies. Goldman Sachs could no longer be a bank holding company. It’s a tall order, and to achieve it Congress would have to enact a modern-day version of the 1933 Glass-Steagall Act, which mandated separation.

Glass-Steagall was watered down over the years and finally revoked in 1999. In the Volcker resurrection, commercial banks would take deposits, manage the nation’s payments system, make standard loans and even trade securities for their customers — just not for themselves. The government, in return, would rescue banks that fail. On the other side of the wall, investment houses would be free to buy and sell securities for their own accounts, borrowing to leverage these trades and thus multiplying the profits, and the risks.

Being separated from banks, the investment houses would no longer have access to federally insured deposits to finance this trading. If one failed, the government would supervise an orderly liquidation. None would be too big to fail — a designation that could arise for a handful of institutions under the administration’s proposal.

Banking expert Bert Ely sees things differently:

Had Glass-Steagall never been enacted, had it been repealed much earlier than 1999 …  the Big Five investment banking firms … might not have become as focused as they did on buying, securitizing, and trading subprime, Alt-A, and option-ARM mortgages. While the large commercial banking companies also engaged in mortgage securitization and originating nonprime mortgages, they did not get as deeply involved in those activities as did the investment banks. Arguably, then, had the separate, distinct investment-banking industry been melded into mainstream commercial banking years ago, today’s mortgage and financial crisis would not be as severe as it is, or may not have occurred at all.

COMMENT

Goolsbee, Summers, et al need to listen to the chairman and his experience. Investment banking & commercial banking are separate functions which cannot be managed well by a single CEO and board.

Posted by bob mayo | Report as abusive

Will Bernanke save the dollar like Volcker did?

Oct 9, 2009 13:49 UTC

David Goldman over at the Inner Workings blog, notes a key anniversary:

Inflation had crossed into double digits after four years of mismanagement by the Carter administration. The gold price was rising (and about to hit an all-time record when the Soviet Union invaded Afghanistan the following Christmas). America’s international position had collapsed; the European elites believed that America would lose the Cold War; America was in deep recession even while inflation soar. Volcker had no choice but to raise the federal funds rate to 15%. The dollar stabilized but the US economy went into free fall.

The San Francisco Fed reported, “Volcker returned from the annual IMF meetings in Belgrade in early October “with his ears still resonating with strongly stated European recommendations for stern action to stem severe dollar weakness on exchange markets. Volcker decided to call a special meeting of the FOMC, a meeting that was not publicly announced, to be held on Saturday, October 6.”

Are we due for a repeat of the Oct. 6 tightening? Not a chance for the time being. No-one wants it, least of all the Chinese — which is why they continue to buy US Treasury debt, albeit at a much reduced rate. But unless the Obama administration finds some way to stop monetizing debt, something like this has to happen.

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