The way Paul Volcker describes it, all economics is local.
That the former Federal Reserve chairman still takes the opportunity to speak at length about the interconnectedness of the collapse of the Soviet Union, the weakness of several major world currencies, and the surprisingly resilient U.S. economy hardly surprises.
The economist in Mr. Volcker is not overly worried (I have no sense of alarm about the short-term outlook). The former bank regulator in him welcomes efforts by the large banks to expand into areas like insurance (So long as the world market remains open, I think diversification is a constructive force for stability).
When Mr. Volcker offered his views last Wednesday on these and a wide range of topics, what was striking was that his audience consisted mainly of 200 or so small-business owners from northern New Jersey, few of whom would ever need an export license.
The program had been organized by NorCrown Bank, an eight-branch community bank in New Jersey. NorCrowns own experiences during the last downturn provided an interesting backdrop to Mr. Volckers address. Hammered by sliding real estate values in the early 1990s, NorCrown might have failed had Charles Kushner, chairman of real estate group Kushner Cos., not stepped in to acquire it in 1996.
Since then NorCrowns assets have grown to more than $220 million from less than $30 million. In the same period, its rivals have also bulked up, and during his speech introducing Mr. Volcker, NorCrown president and chief executive Joseph Paparatto made it clear that the economy concerned him less than did the pending acquisition of local rival Summit Bancorp by FleetBoston Financial Corp.
What I want to do is stop people from going to Fleet, Mr. Paparatto said. When I see people going in their doors, I want to stop them and ask them, Why?
Like others who have watched with interest as some of the biggest banks build themselves into one-stop shops for financial services, Mr. Volcker said the trend would almost certainly create opportunities for small banks that can offer the high degree of customer service small-business customers crave.
Still, he was unflinching in his view that the largest financial companies need to continue the process of expansion, arguing that the process of globalization compels it. The fact that financial markets have assumed the job of directing global capital flows, he said, at least for now has made the world more volatile, and requires that firms seeking to be global players spread out their businesses.
True to his roots as an economist, however, Mr. Volcker served up plenty of caveats. The absence of any meaningful domestic savings, he said, forces the economy into a potentially unhealthy dependence on foreign capital. Also, the paydown of the national debt which he argued was among the most important influences for good in the economy could be put at risk after Election Day by either large tax cuts or increases to federal spending.
On inflation he was also less than sanguine, noting that productivity in the United States was obviously enjoying a boom but adding that he wondered a bit at how calmly the surge in oil prices had been received from an economic perspective. Had the method of calculating the consumer price index not been changed in recent years, he said, the U.S. would be experiencing the highest inflation rate in the entire developed world.
Still unknown, he added, was how much of an effect the ups and downs in the stock market would have on economic activity overall an area at least some economists see as a serious threat.
For the record, the probability of a recession beginning in the coming 12 months is 70%, according to the economists at the Levy Forecasting Center in Mount Kisco, N.Y. The main risks, the center says, are a reversal of the so-called wealth effect on spending as a bear market takes hold, a corresponding reduction in capital spending, and deterioration in the credit system.
And, in a turnabout to Mr. Volckers point about matters global driving economics local, David Levy, in a report on the centers forecast, wrote: The rest of the world depends on the United States for profits to an unprecedented degree. Moreover, in much of the world the debt is more excessive than in the United States.
Were all connected.