Former Federal Reserve Chairman Paul Volcker, the namesake of U.S. rules designed to rein in banks’ proprietary trading, proposed another regulatory overhaul: this time, regarding supervision of global capital flows.
“This is a subject that has been basically ignored for 20 or 30 years now, ever since the breakdown of the Bretton Woods system,” Volcker said in an interview with Bloomberg Television in Hong Kong today. “Behind this immediate crisis of the financial system, the weaknesses in the international monetary system have left these huge imbalances going on and on.”
A new framework is needed to apply “discipline” against the types of imbalances that swelled between the U.S. and China in recent years, with excess American consumption financed by surplus Chinese saving, Volcker said. In a speech later, he proposed a system revolving around “equilibrium exchange- rates” and trading bands that would still allow markets to help determine currency levels.
The world’s most-traded currencies have been set mainly by markets since the postwar Bretton Woods system of fixed currencies broke down in the early 1970s. Volcker, 84, witnessed the collapse when he was at the U.S. Treasury Department in 1973. He later went on to helm the Fed from 1979 to 1987.
“The central idea is that individual nations would direct their interventions and if necessary their economic policies to defending the ‘equilibrium rate,’” Volcker said in his speech at a conference organized by the Fung Global Institute. “One more radical suggestion is that aggressive intervention by trading partners might be authorized by an international authority to promote consistency.”