U.S. Deficit Is Cause for Major Concern, Change: Former Fed Chair

In a rare speaking appearance, former Federal Reserve Chair Paul Volcker weighs in on the nation's fiscal woes.

The federal budget deficit is the only issue 2012 candidates ought to concern themselves with, one expert told a room full of eager listeners Tuesday morning. Anything else would just be nonsense and noise.

For Paul Volcker, former chair of the Federal Reserve, the budget deficit will amount to 90 or 100 percent of the nation's gross domestic product unless it's dealt with now.

“It should be the central debating issue in 2012,” Volcker said during a breakfast fundraiser in Stamford for , a nonprofit organization.

And if the United States doesn’t get serious about dealing with the deficit it risks remaining in a financial morass, Volcker said. While the nation still ranks as the world’s largest economy, China and other developing nations are closing in. In addition a combination of natural disasters and a worldwide financial market collapse caused the economy’s growth to stall, Volcker told the roomful of Wall Street executives and gathered in the ’s ballroom.

Indeed, as Congress prepares to vote on whether to raise the federal debt ceiling, the deficit weighed heavily on many attendees’ minds. Gilman “Chip” Perkins, who runs a hedge fund, said he was most interested in Volcker’s advice regarding the exploding deficit.

“We’re a growing economy,” said Volker, who most recently served on Obama’s Council for Economic Recovery. “But I’m not as optimistic as I was a couple of months ago because of things happening in the world. Normally when you come out of recession, economy snaps back in a hurry. We are barely back where we started.”

The U.S. economy is growing around 3 percent since the 2008 recession ended. That’s not enough, Volcker said. However, he said growth shouldn’t come from the housing market or from over consumption as in the past. 

Instead it should come — in part — from manufacturing. However, Volcker cautioned manufacturing alone isn’t enough. Especially since the emerging world now accounts for about half of the world’s economy.

Today the manufacturing sector in China is growing rapidly. Volcker predicts in a decade or two China will have twice the manufacturing the United States does.

“You stretch that out and in a decade or so China will be the size of us. As an economic force in the world it will be something to contend with,” Volcker said. “Emerging countries have 3 billion or more people. Compare that to about 1 billion people in developed countries … This is not a world where the natural leadership of the United States is going to be listened to as freely as in the past.”

In talking about global issues, from nuclear meltdown in Japan to the financial meltdown of 2008, the effect on individuals isn’t always obvious.

Indeed the reason for Volcker’s keynote address was twofold. One, it offered area business leaders insight into global financial markets. Two, it helped raise cash for a local nonprofit. The breakfast event netted $85,000 for Families in Crisis, one of Family Centers' many programs.

“The economic down turn illustrates the dual tensions between a greater need for social services and the need for budget reform. Family Centers steps into this gap and fulfills those [social service] needs,” said Robert K. Steel, New York City’s Deputy Mayor for Economic Development and Vice Chair of Goldman Sachs.

The private run, nonprofit Family Centers runs 30 education and human service programs to children, adults and families throughout Fairfield County. Among its many programs, it runs three school-based health centers as well as Families in Crisis.

“This year we saw that the numbers coming in were accelerating and far outpacing where we were last year. I would attribute that to the lingering effects of unemployment and the issues that presents for people,” said Robert Arnold, chair and president of Family Centers. “There’s a huge squeeze on the working class. Now we see people with a steady track of work but who have fallen out and can’t get back in.”

That Family Centers sees its caseload increasing speaks to Volcker’s point that the average U.S. household hasn’t seen a real increase in income in the past 15 years. The former Fed chair said only the nation’s top 10 percent is doing better.“That’s not supposed to happen,” Volcker said. “There’s supposed to be the rising tide that lifts the boats and all that … Most of the boats are stuck in the mud.”

An advocate of increased worldwide financial regulation, Volcker cautioned against the growing concentration of assets and the mantra ‘too big too fail.’ And while breaking the big banks into smaller banks is a nice idea, he doesn’t think it practical.

“In fact, out of the crisis the big banks have gotten bigger,” he said.

When Volcker chaired the Federal Reserve, banks in the United States couldn’t have branches outside their own state. Now 5 or 6 of the biggest institutions hold about 60 to 70 percent of the assets in the nation, he said, adding that this concentration makes the concept of too big to fail even more problematic.

“It’s a different world than the world I grew up in,” Volcker said. “I’ve been using the word slog the past couple of years. We have a laborious walk through the tundra to get to where we want to go.”

After the breakfast Volcker participated in a small Q&A for large donors. After some confusion on ground rules, Volcker, who seldom appears in public, insisted the gathering be off the record. The reporters were shown the door.


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