Former Federal Reserve Board Chairman Paul Volcker spent 90 minutes on February 19, 2010, fielding questions in front of some 400 financial professionals, their clients and other guests who came to hear his thoughts on issues of concern for retirement savers.
Topics discussed during the Feb. 18, 2010, program included inflation, the economy, Social Security, estate tax, and restoring investor confidence in the financial system and markets in the wake of the panic and recession of 2008-2009.
In introducing Mr. Volker, AXA Equitable Chairman and CEO Christopher “Kip” Condron said that, “We were in the depths of what is now referred to as the Great Recession. We've come through a period of extreme market dysfunction, including unprecedented volatility and frozen credit markets. To underscore the impact of what some have dubbed the Great Panic, our own just-completed survey points to three key observations.
- "First, fear of inflation has now moved to the top of the list of what worries individual investors, according to the latest AXA Equitable consumer survey.
- "Second, people are now as fearful of not being invested in stocks as they are of being invested in stocks.
- "Finally, the survey confirms that people, in desperation, are increasingly putting off retirement."
Mr. Volcker shared his unique perspective as a longtime public policy decision maker. His impact has been far-reaching and spans decades, stretching from the hyperinflation of the Carter years to the Great Recession and financial bailouts of 2008 and 2009. He referred to Mr. Condron’s use of the word “dysfunction” as the right way to think about the market’s recent behavior.
Below are some of the comments he made in response to questions from the audience and from moderator Norman Pearlstine, Chief Content Officer of Bloomberg LLP, former managing editor of The Wall Street Journal, and former editor-in-chief of Time Inc.
- The Event And
“We can fix Social Security, but it's also true Americans shouldn't be too reliant on it. Social Security should not be the lifeline for all retirement in the United States.
"I think it's very important that there be some basic minimum standard for retirement of Americans encompassed in the term ‘Social Security,’ but I don't think it's any substitute for what individuals should be doing in terms of savings and what private enterprise should be doing in terms of developing sensible, reliable, safe, hopefully somewhat profitable savings plans.
"So I think they go together. In fact, I think the foundation of Social Security kind of frees the way for constructive work in other areas of retirement security."
“You're dealing with a situation where personal savings disappeared in this country for three or four years, and the other side of the consumption boom was no savings. It’s a very odd situation where people – presumably worried about the future, worried about their children – aren't doing any saving.
"But of course it was tied up in part with the boom in housing, but first you had a boom in stock prices and people said we didn't have to save. We'll just let the stock market go up. Then we had the boom in housing, an even more important asset. And they said, ‘We don't have to worry about saving because the price of our house is going up.
“We've gone through a decade where financial returns including returns on houses have been, if not nonexistent, pretty close to nonexistent. They're nonexistent in the stock market. Interest rates are not exactly at levels that make people happy, in terms of savings. And I'm kind of surprised there hasn't been more reaction.”
“This is not a typical recovery. It's a restrained recovery, at the moment. I think it's going to continue to be restrained. You have still a lot of bad credit out there. Lenders are not very eager, by and large. You are dealing with a weaker recovery than has been typical of any past recession that I can remember.
“We've had sharp recessions in the past. But when the economy turns, it turns very sharply. And you will run for a year or two at six percent growth, seven percent growth, maybe in some quarters even about eight percent growth at an annual rate. I don't think that's going to happen this time.”
“I think it's always a good idea to worry about inflation. Once you stop worrying about inflation, then you're in trouble.
“With all the excess capacity we have, with all the need to import stuff that's cheap, given the productivity of the country, I do not think that inflation is an immediate worry. But it's certainly a worry when you look out into the medium term, given what we have in terms of the budget deficit, which is not getting smaller. At the moment it's getting larger.
“The Federal Reserve has got money as easy as it possibly can be, and that sometimes is a forerunner of inflation, not immediately, but there is a big challenge, both fiscally and in terms of monetary policy, in acting in time to head off a potential inflationary situation some years ahead.
“Sometimes the central bankers themselves forget that the job of the central bank is to take away the punch bowl just when the party is getting good. … But if you don't do that and the inflation gets a certain momentum of its own, then it becomes much more difficult to deal with. And you probably can't deal with it without adverse repercussions on the economy.
“That test is going to come, I don't know when – not this year. It could come next year. But the Federal Reserve is going to need support. They're going to need some independence to act at a time when the political pressures are going to say, ‘Oh, no, it's too early.’ A lot of economists will be saying, ‘No, let it run for a while.’ … It's a political problem, a psychological problem.”
“You’ve got three areas of the world economy. The two so-called developed areas: Europe has its problems; the United States has its problems. The emerging world is growing very fast. … [Some estimate that] two or three decades ahead, the emerging world is going to be bigger than Europe and North America put together.
“That's a different world in which we've been living. And it's a world that I think is going to be, in a way, harder to manage, not easier, because it won't have the kind of focus I used to think of as benign leadership by the United States. We simply don't have the leverage.
“If [China] got kind of a bubble and ran into a real problem this year and next year, that would reverberate back on us to some extent, because we're going to have to increase our exports, among other things, and who are we going to export to? We’ve got to export to those rapidly growing countries. And if they're not rapidly growing, we're going to be in trouble, just like historically they've been in trouble when we're not growing.”
Federal Budget Deficit
“I see no possibility that there's going to be an aggressive effort to reduce the budget deficit this year. But I think it is quite right we ought to begin thinking about what do you do beginning maybe a little next year, but certainly in 2012, 2013, 2014.
"We're so deeply in deficit; we're not going to get out of that in a year or two. That's a five-year project. And all this fear about inflation – which I understand and to some degree welcome – [makes] it kind of an impossible political problem, because it's a real threat out there in the future. But there's not much you can do about it today to demonstrate that we're really going to take care of it in the future.”
“Entitlements are a big part of the [fiscal] problem down the road. But the easiest part to deal with – I guess this shows you how difficult it is – is Social Security, which we've known about for years. And nobody has wanted to do much of anything about it,” despite the fact that the solution would involve only a very gradual slowdown in the pace of benefit increases spread over 10 to 15 years and not in anyone’s benefit being reduced."
Financial Services Reform
Pearlstine asked Volcker whether his recent experience testifying in Congress on regulatory reform led him to conclude that Congress is “a place where legislation goes to die.”
“I came away worried,” he responded. “I'm not ready to say I don't think we're going to get legislation or it's impossible to get legislation. But you cannot be down there in that kind of a situation – whether it's testifying or not, but particularly when you're testifying and in direct confrontation, if that's the right word, with the committee – without a sense of combativeness. It becomes a partisan political issue.
"If there's any issue where that should not be true, it seems to me it's in financial regulation. It's not a thing that should arouse great political emotions. But yet you do have a feeling we have a problem in getting any legislation. Having said all that, I think we'll get it, but it should be a slam dunk and it's not a slam dunk.”
Partisanship in Washington
“I have been worried about this for a long time, but it's getting worse: the dysfunctionality of the government. [Indiana Senator] Evan Bayh’s decision not to run again: that experience has been repeated for a number of other senators over the past decade who were thought to be really important, powerful, influential senators who were relatively willing to work in a more cooperative way. There aren't many of those people left in the Congress. … We can't run a government where both parties are fighting with each other to the death on every issue.”
“It's a perfect example of the dysfunctionality of government. … I'm a believer in the estate tax. I think it needs a lot of reform. But I believe we should have a reasonable estate tax in this country. … We're sitting here with about as simple a problem as you can think of – continue the present rate or modify it a bit or do something as a stop gap – but no, nothing.”
“This recent crisis just reinforces the case for big insurance companies to have what I thought of as a voluntary federal chartering system where … I would have thought most of the big ones would choose to have it. You would pretty much have taken care of the systemic problems – the instability problems – that are always in striking fashion with at least one big insurance company. Theoretically, AIG was regulated because it had a tiny little thrift.
“They had no effective federal regulation. And it turned out I don't think they had any effective state regulation, because New York State, which has a strong system of regulation, I don't think saw themselves as looking outside the insurance company into the rest of the holding company effectively. And we need that. I think we're going to get it, if we get any legislation at all. We're going to get some kind of regulator of big financial institutions. It would be a natural thing to do, and have it on a uniform basis around the country for big insurance companies.”
The occasion was the AXA Equitable Thought Leadership Program on Issues Facing Retirement Savers held in the AXA Auditorium in New York. Hundreds of employees and financial professionals and clients also watched the event via live webcast in the company’s locations in New York, Syracuse, N.Y., New Jersey, and North Carolina, as well as in branches in Albany, N.Y., Dallas, Houston, Denver, Jacksonville, Fla., Chicago, and Salt Lake City.
This was the second AXA Equitable Thought Leadership Program in the past year focusing on retirement security. The previous time was a little over a month after the bear market hit bottom in March 2009.
Retirement in America: A Survey of Concerns and Expectations
The study polled 1,000 Americans between the ages of 25 and 70. The survey was conducted in December 2009, and respondents included financial decision-makers with household income of at least $75,000 or investable assets between $250,000 and $999,999.Margin of error for the research is +/- 3 percent, at the 95 percent confidence level. Where necessary, results are weighted to represent overall characteristics of the mass affluent American public. In some cases, comparisons are made to similar studies conducted in February 2009, October 2008 and April 2008.
This content is provided exclusively for informational purposes, is not investment advice, and is not to be relied upon for investment decisions.
The views expressed by Mr. Volcker may not necessarily be those of AXA Equitable Life Insurance Company (NY, NY).
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