Wednesday, May 19, 2010

Volcker Says Time Is Running Out for U.S. to Tackle Fiscal Woes

But is anyone in Washington listening?-SP


Former Federal Reserve Chairman Paul Volcker, a top outside adviser to President Barack Obama, said time is “growing short” for the U.S. to address problems ranging from its budget deficit to Social Security obligations.

“We better get started,” the 82-year-old former central banker said in a speech yesterday in Stanford, California. “Today’s concerns may soon become tomorrow’s existential crises.”

Volcker, speaking hours after the euro fell to a four-year low against the dollar, said Europe demonstrates for the U.S. the hazards of “uncontrolled borrowing.” The European currency slid below $1.22 for the first time since April 2006 as a ban by German authorities on certain bearish investments fueled concern the region’s sovereign debt woes will worsen.

“Little has happened to allay my concerns” raised five years ago that “dangerous and intractable” problems were rising in the U.S., said Volcker, chairman of the president’s Economic Recovery Advisory Board.

“Intractable not just because of the combination of complicated issues, but because there seemed to be so little willingness or capacity to do much about it,” he said during a dinner at the Stanford Institute for Economic Policy Research.

Volcker said in an interview yesterday it will take “years” to restore economic balance in Europe following the debt crisis. European Central Bank President Jean-Claude Trichet has been “particularly effective in maintaining the credibility of the euro,” he told Tom Keene on Bloomberg Radio.

Sense of Urgency

“In the United States, we don’t seem to me to share the same sense of urgency” as countries such as Ireland, Volcker said in his speech. “The time we have is growing short” and “there are serious questions, most immediately about the sustainability of our commitment to growing entitlement programs.”

The Obama administration is forecasting a record annual budget deficit of $1.6 trillion. The shortfall is projected to be $10 trillion over the next 10 years, with interest payments on the debt forecast to quadruple to more than $900 billion annually.

Sovereign debt is becoming an issue “most pointedly in the euro zone” and is “potentially of concern among some of our own states,” Volcker said.

Speaking to reporters before the speech, Volcker sought to clarify remarks he made earlier this month about the possibility of “a potential disintegration of the euro.”

“I didn’t want to suggest, at the moment, Europe was disintegrating,” he said. “They’re fighting very hard, they’re providing a lot of support but it is a challenge for Europe.”

Euro Drops

The euro fell to as low as $1.2144, the weakest since April 17, 2006, before trading at $1.2219 as of 2:25 p.m. in Tokyo from $1.2202 late yesterday in New York.

Europe’s woes are unlikely to derail the U.S. economy, which is undergoing a “subnormal” recovery, Volcker said in response to audience questions. The U.S. has reached its limit on corporate and income taxes, and there isn’t an “easy way” to raise more revenue under the current system, he said, calling a carbon tax “an interesting thing to do.”

In addition, Volcker said the U.S. must rebuild its mortgage market from “the ground up” and higher capital requirements alone won’t be enough to prevent the next crisis.

“Any thoughts that participants in the financial community might have had that conditions were returning to normal should by now be shattered,” he said. “We are left with some very large questions: questions of understanding what happened, questions of what to do about it, and ultimately questions of political possibilities.”

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