Ex-Fed chief Paul Volcker's 'telling' words on derivatives industry -- says derivatives belong in hedge funds, not banks

Dear Readers,

You might be tempted to ask me what the article below has to do with the environment.  Well, it has everything to do with it.  So long as capital is displaced to financial entities instead of to long-term investments (preferably green investments, going forward), we are not going to see any change for the better.  So long as these "creative" financiers are on top of the cash, even now thinking of ways to divvy up the spoils of cap and trade with exotic derivatives, unregulated, we are all going to be in a heap of trouble.  Obama seems to have sidelined Volcker -- a big mistake.  He has only a short window during which he can effect change, and it is closing fast.  At this rate, he will be a one-term president and the Republicans and their War on Science will prevail.  Write to Obama and tell him, please.

Ex-Fed chief Paul Volcker's 'telling' words on derivatives industry

Paul Volcker, the chairman of President Obama's Economic Recovery Advisory Board, stunned a business conference in Sussex yesterday, saying there is "little evidence innovation in financial markets has had a visible effect on the productivities of the economy"

by Louise Armitstead, The Telegraph, December 8, 2009

The former US Federal Reserve chairman told an audience that included some of the world's most senior financiers that their industry's "single most important" contribution in the last 25 years has been automatic telling machines, which he said had at least proved "useful."

Echoing FSA chairman Lord Turner's comments that banks are "socially useless," Mr Volcker told delegates who had been discussing how to rebuild the financial system to "wake up." He said credit default swaps and collateralised debt obligations had taken the economy "right to the brink of disaster" and added that the economy had grown at "greater rates of speed" during the 1960s without such products.

When one stunned audience member suggested that Mr Volcker did not really mean bond markets and securitisations had contributed "nothing at all," he replied: "You can innovate as much as you like, but do it within a structure that doesn't put the whole economy at risk."

He said he agreed with George Soros, the billionaire investor, who said investment banks must stick to serving clients and "proprietary trading should be pushed out of investment banks and to hedge funds where they belong."

Mr Volcker argued that banks did have a vital role to play as holders of deposits and providers of credit. This importance meant it was correct that they should be "regulated on one side and protected on the other." He said riskier financial activities should be limited to hedge funds to whom society could say: "If you fail, fail. I'm not going to help you. Your stock is gone, creditors are at risk, but no one else is affected." 

Link:  http://www.telegraph.co.uk/finance/economics/6764177/Ex-Fed-chief-Paul-Volckers-telling-words-on-derivatives-industry.html