When inflation slayer and former Federal Reserve chairman Paul Volcker spoke in Toronto last summer, he explained how the financial system got into a mess, but offered few examples of how to get it back on course.
Rather than critique the current administration, which he said he wouldn’t do because he understands the pressure of being in power (and he’s also an adviser to U.S. President Barack Obama), Mr. Volcker basically said something needed to change because the financial system as we know it is unsustainable, and left it at that.
A year later, he has changed course. Last month he gave a speech titled “Three Years Later: Unfinished Business in Financial Reform” to the Group of 30, which focuses on international economic issues, and has now sat down with the New York Times to elaborate on this thoughts. One of his key points: safeguard the $2.63-trillion (U.S.) invested in money market funds.
Unlike banks, which are mandated to hold reserves and capital against riskier assets, money market funds don’t have such rules. That alone is a dilemma, but Mr. Volcker said the problem is compounded because most people don’t know this. Investors hear ‘money market’ and they assume their investments are safe in very short-term, liquid assets that are sure to pay them back.
To protect against massive losses, Mr. Volcker advocates changes such as daily valuations of money market funds, so that investors understand the value of their money fluctuates and isn’t equivalent to storing it in a bank account. (The Investment Company Institute has pushed back against such changes.)
But Mr. Volcker didn’t stop at money market funds. His speech covered a number of topics, some of which are covered in more detail in the Times’ piece. One of these issues relates to accounting fraud. To protect the veracity of corporate financial statements, Mr. Volcker said, auditors should be rotated periodically so that accounting fraud could only be conducted if the auditors colluded. The piece is worth a read.