Outside the Box

Saving Capitalist Banking and a Speech by Paul Volker

John Mauldin

February 23, 2009

This week I came across two items that I think are worthy of being in Outside the Box, so I am going to give you both. The first is an essay by good friend Paul McCulley, Managing Director of PIMCO, called "Saving Capitalist Banking from Itself." The second is a recent speech by Paul Volker, former Fed Chairman and a (hopefully very) influential member of President Obama's economic advisory team. This speech is a must read. Taken together they provide a cautionary tale of what the world of banking will need to look like when we get to the end of the process. This OTB is a little longer than most, but I think it is important reading. If you don't know where we are headed, it is hard to imagine the journey.

John Mauldin, Editor
Outside the Box

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Saving Capitalist Banking from Itself

By Paul McCulley

At its core, capitalism is all about risk taking. One form of risk taking is leverage. Indeed, without leverage, capitalism could not prosper. Usually, we think of this imperative in terms of entrepreneurs being able to lever their equity so as to grow. And indeed, this is the case.

But more elementally, economies - both capitalist and socialist - require leverage because savers for very…

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