Does financial innovation contribute to economic growth? That became a hot debate at the Future of Finance Initiative after former Federal Reserve Board Chairman Paul Volcker (pictured left) chastised the largely private-sector group for the timidity of its proposals, and said the ATM was the only financial innovation he can think of that has improved society. What follows are edited excerpts of Mr. Volcker's discussion with The Wall Street Journal's Alan Murray. …

ALAN MURRAY: Mr. Volcker, you have heard the reports from all four of these groups and you have heard the priorities that they have agreed on. We would love to hear your responses.

PAUL VOLCKER: Well, you are not going to be very happy with my response. I heard an awful lot of particulars here that I agree with to some degree, but my overall impression is that you have not come anywhere near close enough to responding with necessary vigor or structural changes to the crisis that we have had. If it is really true that financial weaknesses brought us to the brink of a great depression that would have ended your livelihood and destroyed a lot of the global economy, then let me explain. You concluded with financial-services executives showing cultural sensitivity and responsible leadership. Well, I have been around the financial markets for 60 years, and how many responsible financial leaders have we heard speaking against the huge compensation practices? Every day I hear financial leaders saying that they are necessary and desirable, they are wonderful and they are God's work. Has there been one financial leader to stand out and say that maybe this is excessive and that maybe we should get together privately to think about some restraint? I hear about these wonderful innovations in the financial markets, and they sure as hell need a lot of innovation. I can tell you of two -credit-default swaps and collateralized debt obligations-which took us right to t he brink of disaster. Were they wonderful innovations that we want to create more of? – WSJ

Dominant Social Theme: Big Paul takes it to ‘em.

Free-Market Analysis: There is a power elite, and Paul Volcker speaks for it. That's our opinion, anyway! And that's why we have already commented — just the other day — on Volcker's re-emergence as the oracle of common sense on all matters financial. The former chairman of the Federal Reserve is one tough-nosed cookie and he's always been seen, apparently, by the powers-that-be as a go-to guy when it comes to cleaning up the messes regularly deposited by regulatory capitalism.

Not only does Volcker speak for the powers-that-be, in our estimation, he regularly participates in its promotions, which is why his statements are worth paying attention to, if not for any other reason. He can have his bully pulpit almost whenever he wants, and when he takes it over, there is probably a reason. And we do think there is a reason at this juncture when we are hearing more and more from Big Paul. Yes, the promotion, which he is currently embarked upon with George Soros and others, is the … WALL STREET IS BAD promotion. This promotion is trotted out after every financial debacle and is designed to generate yet more government agencies and regulations to restrict whatever remains of free markets.

Now let us declare at this juncture that we are not avid backers of modern Wall Street. We think Wall Street resembles free-market capitalism as much as the current American sociopolitical system resembles the Constitution that was supposed to organize it. Wall Street is nothing more at this point than a mercantilist enterprise dependent almost entirely, in our estimation, on the US governmental framework and dollar dominance for its endless successes (from participants' point of view) and massive, cyclical ruination.

But Volcker knows that on this issue especially, the issue of modern financial technology, that he can probably do no wrong. People go wild just thinking about a US$400 trillion derivatives market worldwide. They truly believe that the failure of arcane mortgage instruments probably had something to do with the current financial dilemmas they face. For this reason, when Paul Volcker stands up in a room amongst his banking peers and tells ‘em that they are buffoons, people are apt to be impressed.

And yet from our point of view it is a promotion. Volcker's perspective is presented in just the manner that we would expect. The implicit – or explicit – positioning is that financial innovation is something to be frightened about and can cause a string of disasters. These disasters are then capable of costing people their entire life savings. The solution, of course, would be more and better government regulation.

There is nothing very complex about this formulation. It is a standard power elite promotional campaign, one that has been ongoing for more than a century in America and in fact throughout the West. But we will call it what it is: an especially puerile and useless one. Why would we make such a statement? Because we have collectively studied financial history and technology at some length over the past decades and we're fairly comfortable of our assessment about economic cycles and why booms and busts regularly occur. It has NOTHING much to do with financial innovation.

In fact, much of the financial technology that Volcker speaks of got its start in commodities markets. And as such the concepts are not all that modern. We may think for instance that the financial futures developed in the 1980s by the Chicago Mercantile Exchange were the last (or first) word in modern financial technology, but we've read that similar concepts were being trotted out at the end of the Roaring 20s. As for commodities trading itself — how far back does that go? Try thousands of years. Here's Wikipedia on the subject:

Commodity money and commodity markets in a crude early form are believed to have originated in Sumer where small baked clay tokens in the shape of sheep or goats were used in trade. Sealed in clay vessels with a certain number of such tokens, with that number written on the outside, they represented a promise to deliver that number. This made them a form of commodity money – more than an "I.O.U." but less than a guarantee by a nation-state or bank. However, they were also known to contain promises of time and date of delivery – this made them like a modern futures contract. Regardless of the details, it was only possible to verify the number of tokens inside by shaking the vessel or by breaking it, at which point the number or terms written on the outside became subject to doubt. Eventually the tokens disappeared, but the contracts remained on flat tablets. This represented the first system of commodity accounting.

So we can see rudimentary financial innovation began developing in Sumer thousands of years ago. It continues to this day. In fact, there is nothing inherently wrong with financial technology. But what Volcker claims he is disturbed about is its abundance. In fact, modern financial technology is a function of two things: computer power and MONETARY STIMULATION. Do away with either computers or government-based fiat money and you will lessen the development of newfangled financial products.

Now we doubt that Volcker is suggesting that Wall Street do away with computers. (And neither would we.) However, we certainly would suggest that central banking be eliminated. Without central banking fiat-money stimulation the booms that create the thirst for the sort of financial innovation that Volcker decries would be minimized. And that is why we say that Volcker, once more at the behest of those who will benefit the most from further centralization of money and power, is launching himself on another power-elite promotional campaign.

Yes … once more to the breech to suggest Barney Frank, Barack Obama et. al. develop sensible regulation that will save America and the world from the clutches of Wall Street bandits and their derivatives products. Once more to the breech to debate Glass Steagall and mark-to-market accounting. Once more to the breech to declare that the private sector, having proven it cannot discipline itself, much accept the wiser council of elected officials.

NOTED: IRS Studying ‘Protocols' for Joint Audits With Other Countries: "The U.S. Internal Revenue Service is working with tax-collection agencies in other countries on how to conduct joint audits of multinational corporations, IRS Commissioner Douglas Shulman said. "We are in the very early stages of looking at these protocols," he said at a conference in Washington co-sponsored by the IRS and George Washington University. Shulman had said in June he was discussing the idea with officials in other nations. Joint audits would be part of a global effort to crack down on cross-border tax evasion, spurred in the last year by tax- evasion cases involving banks in Liechtenstein and Switzerland. – as reported by Bloomberg

It is all predictable. It is all, we believe, promotional. Do people such as Volcker really not know that the voracious monetary stimulation of central banking creates all sorts of distortions and artificial monetary phenomena? Without the booms and busts of central banking (and the resultant regulation it creates) the world would be a far calmer place. But then again, the powers-that-be would lose their main monetary lever, the ability to create money at will. And Paul Volcker would have far less to complain about and fewer crises to solve.