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In Boston speech, Volcker takes aim at income inequality

For Fed chief also talks pension finance and money market bailouts

Speaking to a room filled with hundreds of Boston investment executives, former Federal Reserve chairman Paul Volcker asked some tough questions about income inequality in America. He called the earnings gap one of the economy’s greatest challenges.

“What accounts for this? What justifies it?’’ an animated Volcker asked. He argued that the trend started in the 1980s and accelerated in the 1990s, with the spread of stock option compensation creating vast wealth and risk-taking.

During that period, he said, the link between pay and performance got “entirely out of whack.’’

The elder statesman of Fed watchers and author of the Volcker Rule — part of the Dodd-Frank reform package after the financial crisis — was speaking before the Boston Security Analysts Society’s annual market dinner Thursday night.


A former banker, Volcker was Fed chairman from 1979 to 1987. In 2008, President Obama named him to lead an Economy Recovery Advisory Board. His Volcker Rule was proposed to force banks to separate their proprietary trading activities from transactions they execute for clients. He said funds used for proprietary trades, in which banks take risks to reap extra profits, should not be protected by federal regulators and taxpayers.

Volcker hit a number of themes that may be viewed as controversial with his audience of 650 executives of top investment houses. In one instance, he criticized money market mutual funds, a business that counts Boston-based Fidelity Investments as its largest player.

Fidelity has argued strenuously against new rules of the money market business, insisting that existing ones are adequate. But Volcker said the run on money markets during the financial crisis, particularly by large investors, indicated a need for change.

Money market funds traditionally maintain a fixed $1 daily share price. But in reality, the various bonds and other short-term investments they own fluctuate in value. In the financial crisis, some money market funds lost money and others added capital to guard against losses.


“The money market fund industry was bailed out by hundreds of billions of dollars,’’ Volcker said, referring to actions of the US Treasury to guarantee funds and loans made available to the funds by the Fed. He criticized money markets as “neither fish nor fowl,’’ saying they “pretend” to be somewhere between bank accounts and mutual funds.

Volcker covered a wide range of topics in an interview format with a staffer from the analysts’ group, from his concerns about underfunded pensions to his view that there are too many financial regulators stepping on one another’s toes.

Perhaps most prominent on the audience’s mind was the recent dip in stocks and its relationship to the Fed’s decision to slow a bond-buying program intended to stimulate the economy. Volcker said a central bank’s hardest job was to start tightening monetary policy soon enough, in the face of inevitable political pressure to keep interest rates low to promote economic growth.

“If you wait too long, it becomes more difficult’’ to prevent bubbles from forming that cause even greater trouble when they burst, he said. Volcker holds the Fed partly responsible for the easy-money policy that fueled risky lending in the mid 2000s, leading to the mortgage securities collapse.

“You’ve got to keep your eye on that danger, and I hope they are,’’ Volcker said of the Federal Reserve’s board of governors.

Beth Healy can be reached at Beth.Healy@globe.com.