BEIJING — Global financial markets are starting to heal and the U.S. economy could begin to grow again this year, but a strong recovery is unlikely, Paul Volcker, a top adviser to President Barack Obama, said Wednesday.
“An expectation of some growth late this year and next in the United States seems reasonable,” Volcker, a former Federal Reserve chairman who leads a panel advising Obama on economic recovery, said in a speech at a conference of global bankers in the Great Hall of the People, the seat of China’s legislature.
However, “a really strong recovery, typical of most recessions, seems unlikely,” he said. “Rather, it is going to be a long slog, with continuing high levels of unemployment.”
The slump also is easing “most clearly” in Britain, trailed by other European economies, with less evidence of recovery in Japan, Volcker said. He said a “healing process” seems to be under way in financial markets.
Volcker cautioned that U.S. growth depends on stimulus spending and “years of deficit spending far beyond past peacetime experience lie ahead.” However, he said inflationary pressures were unlikely for some time to come. That could allow greater leeway to combat the downturn by expanding the money supply.
The legendary Volcker, 81, served as Fed chairman in 1979-87, when he tamed raging inflation but at the cost of painful interest rate hikes that triggered a recession. Obama named him in November to lead the Economic Recovery Advisory Board.
Volcker expressed no enthusiasm for initiatives under discussion in Washington, including regulating bankers’ compensation. He said there is “ample justification” for public anger at pay practices that were “wildly excessive” and encouraged risk-taking at the expense of stability. But he warned against too much political involvement.
“It is far better that individual and professional groups come to grips with these matters than heavy-handed and inflexible regulation or legislation,” he told members of the Washington-based International Institute of Finance, a global association of bankers.
Volcker said there is a “strong case” for reviewing so-called “fair value” rules that determine the value of assets of banks, insurers and other institutions. He said efforts to enforce “mark-to-market” rules on assets fueled confusion and uncertainty.
But he said that while more international consistency is required in accounting standards, politicians should avoid excessive involvement.
“Political bodies in Europe and the United States or any other country are simply not the appropriate venue for reaching well-considered judgments that can be enforced internationally,” he said. “We need a bit patience,” he said, as the International Accounting Standards Board carefully reviews the rules.
Volcker expressed support for a global currency, which he called “the ultimate logic of a globalized financial system.” China and Russia have called for such a currency to replace the dominant dollar, but Volcker gave no opinion on any individual proposal.
He said governments should take steps to limit the possibility of bailouts of financial institutions, possibly by making clear that traditional savings banks will receive deposit insurance while those in riskier businesses are excluded.
“A presumption of government protection and support for financial institutions outside the ‘safety net’ should be avoided,” he said.
But Volcker also defended the role of hedge funds, which some blamed for increased market volatility in late 2008. Some U.S. lawmakers are discussing proposals to increase oversight on such funds, which have an estimated $2.5 trillion in assets but operate mostly outside government supervision.
“Hedge funds and private equity funds have an entirely legitimate role to play in providing liquidity and innovation in our capital markets,” Volcker said. “I do not believe they need to be so closely supervised and regulated as depository institutions.”
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