In a role that would later deem him “the man who broke the back of inflation,” Volcker took the helm of a weakened and disillusioned Fed in August 1979. Known for his no B.S. attitude and blunt, conservative style, Volcker’s appointment was only made under significant pressure on the Carter White House to lick the inflation problem.

After years of wishy-washy policy – and a widespread sense that the Fed simply didn’t have the cojonesto deal with inflation once and for all – the intense pain that Volcker was willing to inflict (via high interest rates) led to the inflation-subdued conditions from which the late, great bull market sprang in 1982.

Volcker was also in the mix on August 15, 1971, when President Nixon shut the gold window. As Tricky Dick informed the world that “We are all Keynesians now,” ushering in a decade of runaway prices and platform shoes, Volcker was dispatched on an urgent, two-year globe-trotting mission in his role as Treasury Under Secretary for Monetary Policy and International Affairs.

The goal of Volcker’s mission: To hold together the long-standing currency exchange system that Nixon had blown apart in 1971… and convince the rest of the world America had not gone mad.

No one has more claim to “been there, done that” than Volcker. Perhaps more importantly, Volcker has shown a capacity to act under pressure – and to make incredibly tough decisions when need be. In his role as Fed Chairman, taking on a dragon (inflation) that many thought unslayable at the time, Paul Volcker endured scathing criticisms and sharp reversals of fortune that would have broken lesser men.

So Where Did He Go?

All this counted as good news when, in 2008, it emerged that Volcker was advising the Obama campaign. Many who had misgivings in regard to team Obama’s unknown and untested political agenda were soothed, at least partially, by the thought of a wise and experienced hand like Volcker’s playing a role.

Alas, on examining the policy put forth by Washington thus far, the man’s fingerprints are nowhere to be found. The White House gave Volcker an impressive sounding title – head of the “Economic Recovery Advisory Board” – and then seemed to ignore him completely from that point on.

It’s true that Volcker, now in his 80s, has a heightened taste for fishing these days. But one has to wonder if there wasn’t a bit of bait and switch going on here. Use a man’s stature to lend gravitas to a fresh-faced political campaign, promise to listen closely and heed his wisdom, and then…

A Wall Street Railroad

We here at Taipan Daily have no special dispensation as to why the meatheads in Washington do what they do.

But we do have the ability to make an educated guess or two… and the guess here is that Volcker wound up getting railroaded. It’s a good bet that Volcker made the mistake (if one could call it a mistake) of being too forthright in his views – not willing enough to “play ball” as it were.

You see, the White House finance team is dominated by a Wall Street mentality. So dominated, in fact, that insider culture permeates the place like the smell of trout guts in a fish market.

One can see this (or rather smell this) in observing team Obama’s top financial pitchmen, Tim Geithner and Larry Summers. As president of the New York Fed, Geithner was a creature of Wall Street, bought, sold and paid for, from day one. Even the staid New York Times has called out Turbo Timmy, noting his exceptional “reliance on bankers, hedge fund managers and others.”

And if Obama advisor Larry Summers didn’t start out aspiring to be top shill on the hill, he certainly wound up settling in to the role quite nicely, having raked in a cool $8 million (give or take) in speaking fees and hedge fund consulting fees these past few years.

In addition to the above, add in the fact that Goldman Sachs is not just a mega-powerful investment bank these days, but a weird sort of temp agency with a quasi-official role in filling all high-level government finance posts.

The net result is a sort of noxious self-interest cocktail that proves toxic to anyone not considered a tried-and-true friend of Wall Street. And that would include Paul Volcker.

Glass-Steagall Blasphemy

In the eyes of Wall Street, Volcker’s apparent sins are twofold. First, he openly endorsed “Glass-Steagall-like” restrictions on Wall Street investment houses. Second, he showed warmth to the idea of banks as utility companies.

The Glass-Steagall Act was passed in two parts in 1932 and 1933. The second half of Glass-Steagall, also known as the Banking Act of 1933, required commercial bank activity and investment bank activity to remain separate by law.

For 66 years, Glass-Steagall was the law of the land. Under Glass-Steagall, investment banks could not take customer deposits or make commercial loans. Commercial banks, meanwhile, could not get involved in high-powered investment bank-type activities.

Glass-Steagall was repealed in 1999 (Thanks Phil Gramm!) by Republican majority vote. Thanks to this move, the blind-idiot-behemoth known as Citigroup was born. Before the repeal, Citi had to more or less stick to its boring customer deposit knitting. After the repeal, Citi was free to gorge on the high-powered stuff, with the leverage of customer bank deposits and FDIC insurance as a backstop… resulting in the quivering mass of financial wreckage now splayed out at our feet.

In suggesting that a new “Glass-Steagall-like” reform would be a good idea, Volcker declared himself an enemy of Wall Street. Through the eyes of the bankers, unfettered leverage is good – even if it blows up the entire country every once in a while – because anything that fattens the kitty at bonus time is good. To return to the days of Glass-Steagall would be a step backward in the banksters’ eyes, as would any maneuver that threatened to permanently reduce their power.

The same thought process applies to Volcker’s endorsement of the “banks as utility companies” idea. This is the notion that any business back-stopped by government should be a safe and boring business by law. The logic runs something like this: “You want to do sexy exotic stuff? You want to take big risks with your own investors’ capital? Fine. Just don’t do it with taxpayer funds, don’t do it as a government-backed entity, and don’t expect a bailout if you blow up. If you want to enjoy FDIC insurance, “too big to fail” support, or any other form of government support or largesse, then you need to take the plain-vanilla restrictions that come with that.”

Seems like a fair trade-off, no? In the eyes of Wall Street, that’s exactly the problem.

Keeping the Deal

Right now Wall Street has a very sweet deal, which some have memorably characterized as “socialism for the rich.” One can also think of it as “I take the upside, you take the downside.” As in, when a cockamamie scheme works out, the players reap tens or hundreds of millions… but when it doesn’t work out, the taxpayer gets socked with the bill.

If the White House were to embrace the idea of making banks more like utility companies, as Volcker suggests, then Wall Street’s sweet deal would disappear. The pleasingly asymmetric nature of the equation – heads Wall Street wins, tails someone else loses – would be lost.

And so, most likely, this is why Volcker has been muzzled. Geithner and Summers live in Wall Street’s back pocket. They are shills or, possibly worse still, moles… tasked with making sure the interests of the true master are served. President Obama seems either not to know or not to care. Either way the result is the same… the financial interests of the United States have more or less been hijacked by a quiet oligarchy. Worse still, when the self-interests of this oligarchy run directly counter to the economic interests of the country, it is the country that loses. Every time.

Paul Volcker, on the other hand, is not a shill. Not a mole. Or at least, he hasn’t shown any clear sign of being such. If Volcker had been “compromised,” he would be out there towing the party line – putting his credibility to work in service of the agenda, à la Colin Powell and the Iraq War.

One can only speculate as to the thoughts in Paul Volcker’s head. Your humble editor’s guess, though, is that the man feels snookered. He may well have been caught up in the bright shining spirit of the 2008 presidential campaign… the thought of a new day, a new broom sweeping clean, and helping America out of a serious jam (as he once did all those years before).

But one can only do so much, and good intentions only stretch so far. On realizing the truth, the 81-year-old Volcker may well have shrugged and gone fishing.

Source:  The Unconscionable Muzzling of Paul Volcker

Good day… And a Terrific Tuesday to you! Well… The reigniting of fears really caught some wind in its sails yesterday, and why not? You see, Lehman Brothers was rumored to announce their first quarterly loss since going public, and will seek additional capital to shore up their balance sheet… I keep telling people / anyone that will listen, that we’re not even close to being out of the woods, and the losses, if being honest, will continue to mount…

Did you see the news yesterday that Wachovia’s CEO was asked to resign? Or that Washington Mutual also announced a change at the helm… It wouldn’t surprise me one iota if long after Lehman announces that loss that another “change” is announced…

So… The Risk Aversion has a two day win streak going… It will be interesting to see if the Lehman story comes to fruition, and if it does, what it will do to the Risk Aversion move… Or… Was it a case of sell the rumor, buy the fact? We’ll have to see, eh?

With the two day win streak for Risk Aversion, the currencies have seen some lovin’ once again… Forgotten but not gone, the euro, yen, and franc all posted nice gains yesterday and overnight… I’m seeing a little dollar strength right now, as the euro was 1.5606 when I turned on the screens, and it’s now fallen back below 1.56…

Eurozone Manufacturing posted a better than expected number yesterday, remaining above the 50 level… So… Economic growth hasn’t slowed as much as the pundits have been going around talking about… Inflation remains the bugaboo for the European Central Bank (ECB) and ECB President Trichet…

I had a reader send me a very funny note yesterday regarding the Eurozone’s inflation problem… “A suggestion for the Eurozone. If they’re worried about rapid rising inflation stats they should hire the U.S. stat calculation folks and they can moderate those nasty numbers and give them the great peace we have here in the USA!”

Now that’s funny! Whoa! We just had a streak of lightening outside my window here that was too close for comfort! It made me jump! The rain is falling so hard that it sounds like a train on our roof! Yikes! I’m sure glad I made here before this all started! WOW!

Speaking of Manufacturing reports… The U.S. ISM Manufacturing Index, did improve in May, but remained under the 50 level that marks the dividing line between contraction and expansion… These data reports lately don’t really say anything but confirm my friend, John Mauldin’s description of the economy… “muddle through”…

Speaking of John Mauldin, I’m going to be speaking in Dallas in September, and I going to catch up with John then… I’m looking forward to that!

Yesterday, I reported that the Australian Retail Sales shocked on the downside, but warned not to take one soft report and make a slowdown of it… Then came word that the soft Retail Sales could be explained… Let’s listen in on the explanation from the folks down under… “Retail trade fell by 0.2% in April, well below expectations for a rise of 0.2%. However almost all of this decline is due to the early timing of Easter, which caused unusual volatility in food retailing.

Ex-food, retail trade has been flat for the last two months. Moreover, sales in some discretionary areas, such as household goods and clothing are holding up quite well.”

Like I said yesterday, I don’t see anything here that makes me change my thought that the Reserve Bank of Australia will hike rates two more times this year… Oh, and one thing to think about here is on July 1st, income tax cuts set in, and I would expect this to spur economic activity like Retail Sales…

There are lots and I mean lots of people jumping off the weak dollar trend bandwagon these days… And most have very good reasons for doing so, at least that’s what they think! I prefer to think of this as a “pause”, not a reversal… Sort of like 2005, when the currencies got ahead of themselves at the end of 2004, only to spend 2005 in the correction mode, before going bonkers in 2006 & 2007.

The euro had moved so quickly from 1.44 at the end of the year, to 1.60 in less than 5 months… Can you say, too fast too soon? A Pause of the Cause, is what it looks like to me… As I said yesterday, the fundamentals in the U.S. are just absolutely awful! And since we’re dealing with nothing but fiat currencies these days, the “attitude” toward a currency can dictate the performance… But eventually, that “attitude” will come back to the underlying fundamentals…

So… In other words… The “attitude” may be changing toward the dollar… But, it’s not a trend reversal, it’s a Pause… Eventually, the underlying fundamentals will come home to roost!

One of those awful fundamentals is the Current Account Deficit… A reader made a great point yesterday in an email… “Didn’t they make a BIG deal about this when talking about the deficit a coupla years ago? That the reason that they don’t matter was that we had a healthy GDP (4.0%? at the time?). Well, how about now, with a .9% GDP??? (if you believe that number!) Shouldn’t there now be an uproar about the deficits?”

He’s absolutely correct! Why isn’t there an uproar about these deficits? Because, to harp on the Deficit would not make us “feel good”! But you know me… I like to pour salt on a wound… And that wound is the Deficit! I’ll repeat what I always tell a crowd when speaking… The folks that say Deficits Don’t Matter remind me of the man on top of the Empire State Building… He decides to jump off the building… And as he passes the 56th floor, he says… “So far, so good!”

OK… Remember 3 months ago when I was speaking just about every day on some radio station about the so-called “Stimulus Package”? I kept telling anyone that would listen to me that this was no “stimulus package”, that it was simply another “tax” and an additional $150 Billion on our already bleeding deficits! I said then that “by the time the checks get in the hands of consumers, they will be so stretched out from rising costs that they will most likely use the funds to pay a bill, pay down some debt, or save (a novel idea, eh?) but not spend the way the Gov’t wants them to do… Well…

The chickens have come home to roost on this “stimulus package”… Dave Carpenter wrote on Friday in the Chicago Tribune that “many consumers spend rebates on cost of living”… Here’s a snippet of his report…

“But reality has interfered, in the form of ever-climbing food bills and $4-a-gallon gasoline. Day-to-day living costs have sopped up the checks for many other early recipients and spoiled their rebate fantasies. Government figures released Friday showed consumer spending inched up just 0.2 percent in April, despite widespread anticipation of the stimulus payments sent out starting late in the month.