In a recent talk, former Federal Reserve Chairman Paul Volcker offered a few observations about the roots of the current financial crisis and proposed a few regulatory and systemic changes. Three very different headlines with three very different agendas regaled readers after Volcker’s appearance Friday at Columbia University’s sixth annual Center on Capitalism and Society conference. One actually said that Volcker thinks this crisis could be worse than the Great Depression. Did he really say that?
The headlines matter: They were repeated over and over via Twitter and a number of financial blogs. They matter more in this case because not only is Volcker a respected elder statesman of finance but he is also an active advisor to President Obama. His words have potential implications for policy. Here are the three headlines:
Crisis may be worse than Depression, Volcker says (Reuters)
Volcker: Not Cheering for ‘a Little Inflation’ (The Wall Street Journal)
Volcker Says U.S. Economy May Suffer for a `Long Time’ (Bloomberg)
I decided I needed to listen to the speech itself. In brief, this is what I heard: Volcker blamed financial engineering for masking systemic imbalances that helped to bring the economy to its knees. He also suggested banks reclaim their central role as credit providers and that the Federal Reserve not lose sight of its chief mandate: Inflation fighting (stabilizing prices). I also heard him say that it would take a very long time to clean up the mess and that he is relieved that his grandson has abandoned a career as a financial engineer, an ignoble career path.
Volcker did make a reference to the Great Depression. Not everyone bothered to quote him on this point, however. Reuters gave prominent play to the quotation: “I don’t remember any time – maybe even the Great Depression – when things went down quite so fast and quite so uniformly around the world.”
Reuters omitted what Volcker said next: “Obviously, we are at a level way above where we were in the 1930s.” In other words, the central banker carefully phrased his remarks. He was “shocked” by the pace of decline in industrial production globally. He was clearly concerned. But he was not offering a Great Depression scenario.
We are in a heightened state of sensitivity; anything that hints we are heading into a Depression makes us sit up scared. And a comment from a well-respected figure like Paul Volcker on the Great Depression carries greater weight than a comment on the same topic, say, from Rep. Barney Frank or Sen. Chris Dodd.
The three different takes on Volcker’s comments point up the critical role that the media play in how the average person feels about the current crisis. Is it a Great Depression (Volcker says so!!)? Should we pump money into the system willy-nilly to avert a Great Depression (Volcker says no! The Federal Reserve must be vigilant against inflation!). Or do we need to be prepared for a long slog through an economic mess — but we’ll get through it?
Seeking Alpha summed up Volcker’s comments with this bouquet: Volcker Says He Is Confident Capitalism Will Survive
The blogger sadly shakes his head that this is something that needs to be said at all. And why must it be said? Because the financial system is so wounded or is it because the media is so intent on making even what Volcker calls “the mother of all financial crises in the United States” seem even worse than it is?