Paul Volcker — one of the most consistently refreshing members of the administration on economic issues — apparently delivered quite the tub-thumping speech at the Chicago Fed today.
WSJ has a recap of some key targets.
“We had all our best business schools in the United States pouring out financial engineers, every smart young mathematician and physicist said ‘I don’t want to be a civil engineer, a mechanical engineer. I’m a smart guy, I want to go to Wall Street.’ And then you know all the risks were going to be sliced and diced and [people thought] the market would be resilient and not face any crises. We took care of all that stuff, and I think that was the general philosophy that markets are efficient and self correcting and we don’t have to worry about them too much.
And the financial system:
“The financial system is broken. We can use that term in late 2008, and I think it’s fair to still use the term unfortunately. We know that parts of it are absolutely broken, like the mortgage market which only happens to be the most important part of our capital markets [and has] become a subsidiary of the U.S. government.”
“Money market funds have encroached so much on the banking market. They are nothing, in my view, but a regulatory arbitrage. The purpose that they serve in handling payments and short term paper is a commercial banking function” but they don’t hold the capital or face the regulation of banks.