I have great respect for Mr. Paul Volker, former Chairman of the Federal Reserve Board. He is widely credited for saving the US financial system from an environment where inflation was 13.5% in 1981 to about 3.3% in two years. He did not bow to business or political pressures and gave the economy the tough medicine it needed in the form of high interests rates. Unlike Greenspan who embraced cheap money policies for all economic ills, Volker embraced policies that treated recessions as necessary evils to cleanse excesses in the system.

Mr. Volker penned an excellent Op-Ed in the New York Times on Jan 30. How to Reform Our Financial System. It is a must read.  Excerpts:

What is essential now is that we work with other nations hosting large financial markets to reach a broad consensus on an outline for the needed structural reforms, certainly including those that the president has recently set out. My clear sense is that relevant international and foreign authorities are prepared to engage in that effort. In the process, significant points of operational detail will need to be resolved, including clarifying the range of trading activity appropriate for commercial banks in support of customer relationships.

I am well aware that there are interested parties that long to return to “business as usual,” even while retaining the comfort of remaining within the confines of the official safety net. They will argue that they themselves and intelligent regulators and supervisors, armed with recent experience, can maintain the needed surveillance, foresee the dangers and manage the risks.

In contrast, I tell you that is no substitute for structural change, the point the president himself has set out so strongly.

I’ve been there — as regulator, as central banker, as commercial bank official and director — for almost 60 years. I have observed how memories dim. Individuals change. Institutional and political pressures to “lay off” tough regulation will remain — most notably in the fair weather that inevitably precedes the storm.

The implication is clear. We need to face up to needed structural changes, and place them into law. To do less will simply mean ultimate failure — failure to accept responsibility for learning from the lessons of the past and anticipating the needs of the future.