Henwood on Dodd-Frank.

The Volcker Rule by John Cassidy

Volcker’s skepticism about bankers and other financiers dates back to his days at the Fed, where he opposed the Reagan Administration’s efforts to deregulate the banking system. In 1982, Congress passed the Garn-St. Germain Depository Institutions Act, which gave struggling thrift banks (also known as savings and loans) the right to make commercial loans. (Previously, they had been restricted to residential lending.) The legislation was intended to enable thrifts to earn higher profits, and it was strongly supported by Treasury Secretary Donald Regan, the former head of Merrill Lynch. Volcker repeatedly disagreed with Regan and with other members of the Administration. Referring to the S. & L.s, he told his staff, "Give ’em commercial lending power, and they’ll end up with all the bad loans."

This is precisely what happened, and Volcker regards the S. & L. crisis, which ended up costing taxpayers about a hundred and eighty billion dollars in today’s money, as a template for the financial catastrophe of 2007-08. Unlike many economists, who regard financial innovation as generally a good thing, he is suspicious of many things that today’s big financial institutions do, such as creating complex securities and building elaborate mathematical models. Last December, at a conference in England for banking executives, he said that the most important banking innovation of recent decades was the A.T.M.

...
"It does show leadership in the United States, which will help encourage actions abroad. Without the U.S. stepping up, you’d never get a coherent response." He pointed out that the language banning proprietary trading was strong and that even the much weaker language on hedge funds and private-equity funds still contained some safeguards that would force big banks to change how they do business. He also cited the crackdown on derivatives trading and a clause, which he had campaigned for, that creates a position for a second vice-chairman of the Fed, who will be explicitly responsible to Congress for financial regulation. "I think that might turn out to be one of the most important things in there," he said. "It focusses the responsibility on one person."

Anthony Dowd [Volker's chief of staff] added, "We both felt like we got kind of excluded at the very end. But, when you step back, there were fifty-four lobbying firms and three hundred million dollars spent against us. So we didn’t do too badly."

To summarize, the bursting of the housing bubble caused a loss of aggregate demand and turned many loans bad which caused firms like Bear Stearns, Lehman Brothers, A.I.G., etc. etc. to collapse. Which caused a chain reaction and panic - no one trusted anyone else's accounting until the "stress tests" - which further reduced aggregate demand in a vicious circle. And then the governments of the world stepped in.

The economy is growing again, yet there's risk of it slipping into a double dip recession. Many in the Pain Caucus - who don't like seeing all of this government action and deficit spending even during a recession - argue the economy needs no more help from the government or central banks and will continue to grow on its own.

Inflation Fears

Ken Rogoff is a professor at Harvard and dues-paying member of the Pain Caucus. Not surprisingly he has worked at the IMF. Brad DeLong debates him in the Financial Times where he writes "Rogoff sees the economy now as suffering from structural maladjustments generated by the expansion of the 2000s in which workers must be trained in new kinds of jobs and shifted over to different sectors in which they have no previous experience, and that that process cannot proceed rapidly without generating inflationary pressures that will destabilise confidence in price stability." Maybe the bubbliciousness of the 2000s came in part from the profits made off of shipping jobs overseas?

Sewell Chan writes that the "Fed is in the Hot Seat," as Bernanke testifies before Congress today.

With unemployment high and inflation low, a question is being asked more often and more loudly: Can and should the Federal Reserve do more to get the economy moving?

...
So far, the debate within the Fed has occurred largely outside of public view, but it reflects how the economic picture has darkened from just a few months ago, when the prospects for a gradually improving economy and a robust stock market seemed more hopeful. Back then, the dominant talk was when to start tightening monetary policy and selling assets on the Fed’s balance sheet.

"Now there is a general recognition that that talk was premature," said Peter N. Ireland, a professor of economics at Boston College and a former economist at the Federal Reserve Bank of Richmond.

Why was that talk premature, as in why where they overly optimistic? That's what I would ask Bernanke after pointing out that the Fed missed the housing bubble which cost the economy trillions. Since the Fed has been consistently wrong, is it possible the Fed has a bias? (As Dean Baker points out, the IMF has been consistently wrong which suggests it's policy recommendations are politically motivated.)

Sewell Chan:

In addition, although core inflation, which excludes the highly volatile prices of food and energy, has been running at about half of the Fed’s target of nearly 2 percent, inflation expectations "have not come down nearly as much as one would expect, given how much slack there is in the economy," Ms. Dynan said.

The size of the Fed’s balance sheet, which has more than doubled since the financial crisis of 2008, and the large amount of bank reserves sitting at the Fed has made officials at the central bank nervous about the potential for rapid inflation once banks decide to start lending more vigorously again, she noted.

Where is Ms. Dynan's data on high inflation expectations? Link please? Again I don't understand where this fear of phantom inflation is coming from. With unemployment high, the economy in a liquidty trap, and aggregate demand weak, everyone should be afraid of deflation. Very afraid.