Wednesday, October 7, 2009

Paul Volcker on the U.S. Economy: Listen Very Carefully

Paul Volcker: You Call This An Economic Recovery?

It’s the last day of the third quarter, and the stock market has had a great run. Blue-chip stocks are on pace for the best quarterly performance since 1998. Investors seem to think strong corporations can still generate profits, while unemployment remains high.

Along comes former Federal Reserve Chief Paul Volcker to throw a wet blanket on the stock market’s cheery camp fire. Speaking this week in a two-part interview on “Charlie Rose, ” Volcker takes a much more dour view on the economy than many advisers in the Obama Administration.

chascar via flickr
Storming into the Fourth Quarter

Here’s Volcker on the current economic “recovery”:

“I think it’s questionable of how rapidly the economy will expand after this recession, because there are a lot of basic adjustments that have to be made…. We can’t just pump up consumption and pump up housing again. Might pad us for a year or two, but it’s imbalance that got us in trouble in the first place. We’ve got to work toward producing more goods, selling more goods abroad, being more competitive abroad, maintaining a decent rate of savings, bringing budgetary–federal budgetary situation back into something that’s sustainable, and all those things, plus the financial market is wounded. There’s no doubt about that, and it won’t recover from those wounds, deep wounds for a while.” (When pressed, Volcker wouldn’t put an exact time frame on the recovery, but said it would take “several’ years.)”

And here is Volcker on what he sees as the next shoe to drop on the banking system.

“The single threat in the credit area right now is commercial mortgages…commercial real estate’s in trouble… I think in terms of taking the loss and recognizing loss has only just begun.”

And finally, Volcker weighs in on the threat of inflation, a subject on which he is well versed. As Fed chief in the early 1980s, Volcker earned his spurs, fighting to limit inflation despite pressure to lower interest rates to pump up the economy.

“You ought to be potentially worried about inflation…the administration is perfectly conscious of the fact that they’ve got a problem….they say, our hands are tied, we can’t do anything now, unemployment is close to 10%, the economy is weak, there isn’t any apparent inflation problem at the moment, prices are nice and stable. But we’ve got that budget deficit….We’ve got to be careful about this. But it’s a problem for at least a year out, two years out, three years out.”