Paul Volcker: Derivatives Have Not Produced Anything Good

Even Paul Volcker admits the shrewdest creation in the history of post-war finances is just that, shrewd !

December 10, 2009 —At a conference in Sussex, England, Paul Volcker stunned a banker audience by challenging them to come up with one example of a positive effect of derivatives. At the conference "Future of Finance Initiative" organized by the Wall Street Journal, Volcker said that the "single most important" contribution of the financial sector in the last 25 years has been automatic teller machines, which, he said, had at least proved "useful." He said that credit default swaps and collateralized 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 Volcker did not really mean that bond markets and securitizations 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."

Volcker said that banks do have a vital role to play as holders of deposits and providers of credit. This importance meant that it is 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 which society can 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."

"Volcker's comment has frozen the audience," Il Sole 24 Ore wrote. Volcker: "I would like one of you to give me the example of one single so-called innovative financial product that has produced benefits for economic development. I am sorry, but the answers you offered seem to me inadequate."

Since Volcker said he agreed with Soros on this, some media are speaking of a "Soros-Volcker alliance" (Il Sole 24 Ore). Soros, speaking before Volcker, defended hedge funds, which "in contrast to banks, risk their own money." He attacked CDS and called for a "New Economic Thinking."

Tory leader David Cameron also was present. He said that his party does not intend "to put limitations on bank sizes. Instead, we will establish a correlation between risks and capital. Financial services are the central part of the British economy and will stay so."