Paul Volcker warning about the economic situation in 2005

"Under the placid surface, at least the way I see it, there are really disturbing trends: huge imbalances, disequilibria, risks – call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot.”

We are buying a lot of housing at rising prices, but home ownership has become a vehicle for borrowing as much as a source of financial security."

"Altogether, the circumstances seem as dangerous and intractable as I can remember. But no one is willing to understand [this] and do anything about it."

"Boomers are spending like there is no tomorrow."

"Homeownership has become a vehicle for borrowing and leveraging as much as a source of financial security."

"I come now to the heart of the problem, as a Nation we are consuming and investing, that is spending, about 6 per cent more than we are producing. What holds it all together? - High consumption - high leverage - government deficits - What holds it all together is a really massive and growing flow of capital from abroad. A flow of capital that today runs to more than $2 Billion per day."

"What I'm really talking about boils down to the oldest lesson of financial policy in Central Banking: A strong sense of monetary and fiscal discipline."

Excerpts from speech by Paul Volcker at the Second Annual Summit of the Stanford Institute for Economic Policy Research (11 February 2005).

http://news-service.stanford.edu/news/2005/february16/summit-021605.html.


Paul Adolph Volcker was Chairman of the Federal Reserve under United States Presidents Carter and Reagan from August 1979 to August 1987. Under his tenure, the Fed was credited with ending the stagflation crisis of the late 1970s and early 1980s. After leaving the Fed he worked on Wall Street and served the United Nations as an advisor on the Iraq Oil for Food Programme. He is a member of many “Establishment” groups in the United States. A Democrat, he serves an economic advisor to Democratic presidential candidate Barack Obama.

Many people understood the deteriorating economic and financial position of the United States well before the collapse of the financial sector towards the end of 2008. In this speech, Mr. Volcker spoke not only of the “huge imbalances and risks” building in the economy but the coming challenges presented by its ageing population and the unsustainable trends that at that time described the world economy. Yet no one listened. Although Volcker’s speech was the keynote of an important economic conference, news reports focused on the contributions of others at the event.

Volcker is a wise man who has served his country well in many capacities. It is a shame we did not pay more attention to him at the time he sounded his warning. One only has to wonder how many more warnings of potentially catastrophic events we are ignoring at this very moment.

A video of Mr. Volcker’s speech is available at: http://news-service.stanford.edu/news/2005/february16/videos/23.html.