Five of the meetings between Bernanke and Volcker during the past year were one-on-one. They met a sixth time when Bernanke attended a session of Obama's Economic Recovery Advisory Board, which Volcker heads. Fed spokeswoman Michelle Smith declined to comment on the meetings.

As contacts between the two increased over the past year, Volcker has become more supportive of Bernanke and the Fed, backing the central bank chief for a second term and supporting his efforts to keep the Fed's bank-supervisory role.

"Ben has been through the fire," Volcker said in a telephone interview. "He's much better qualified now than he was four years ago, before he went through that experience."

The Senate on Jan. 28 voted 70 to 30 to confirm Bernanke, 56, to a second term as Fed chairman.

'Very Edge'

Volcker initially voiced concern about the Fed's actions in combating the crisis, telling the Economic Club of New York in April 2008 that the central bank had acted at "the very edge" of its legal authority in helping to rescue Bear Stearns Cos.
When he next appeared before the club, on Jan. 14, Volcker devoted much of his speech to a pitch for the Fed to retain a role as a financial supervisor. His comments came a day after Bernanke sent an 11-page paper making the same argument to members of the Senate Banking Committee.

Asked about his earlier misgivings about the Fed's actions, Volcker replied, "A number of things were done that make me squirm. That doesn't mean they weren't important. I think they made Mr. Bernanke squirm" too.

"What happened is that things played out a little differently" than Volcker expected, said Robert Kavesh, an economics professor at New York University who has known the former central banker for six decades. "The Fed had to look at all the alternatives" in trying to revive the economy from its deepest decline since the 1930s, added Kavesh.
Political Scrutiny

Volcker was right to be concerned that the Fed's actions in rescuing financial institutions and combating the crisis might open it up to political criticism, said J. Alfred Broaddus, a former president of the Federal Reserve Bank of Richmond.

"The level of anger with the Fed is greater now" than it was back in the early 1980s, when Volcker pushed interest rates up to 20 percent to bring down inflation, said Broaddus, who was a lower-ranking Richmond Fed official at the time.

That anger -- and the threat it poses to the central bank's independence -- may have convinced Volcker to step up his support of Bernanke and the Fed, said former Fed economist David Jones, president of Denver-based DMJ Advisors and author of four books on the central bank.

"His dedication to the principle of central banking independence has no limits," added Neal Soss, who served as Volcker's assistant from 1981 to 1983 and is now chief economist for Credit Suisse Holdings USA Inc. in New York.

Opinion Article

Volcker endorsed giving the Fed the power to guard against risks to the financial system as a whole in an opinion article in the New York Times on Jan. 30.

He also agrees with Bernanke that the Fed's supervisory role is integral to its ability to set monetary policy.

"What seems to me beyond dispute, given recent events, is that monetary policy and the structure and conditions of the banking and financial system are irretrievably intertwined," he told the Economic Club last month.

At the same time, Volcker appealed for help in fighting bank lobbyists that he said were promoting "reform lite."

"There is heavy lobbying on the other side, and that has to be overcome," he said.

David Fuller's view Those of us who are old enough to remember an earlier financial crisis, can recall how Paul Volcker saved the US economy from runaway inflation when Chairman of the Federal Reserve from 1979 to 1987. We are fortunate that this towering (in every respect) 82 year old still has President Obama's ear and is actively involved in US financial policy.

Volcker's policies are inevitably controversial - what isn't, these days? However I maintain that his ideas will largely prevail because only Volcker has the credibility and moral authority to guide the President and Congress in this battle. Moreover, the naïve or self-serving brigade, advocating: 'deregulate everything and the market will always provide the best solution', are discredited and somewhat chastened.

Of course the financial industry would like to retain the casino environment which sapped the US economy over the last fifteen years, as Jeremy Grantham so forcefully pointed out in his latest letter (see yesterday's first email), but it has lost some credibility without rip-roaring bull markets and the banking sector has certainly lost moral authority.

How might any of this affect stock markets?

When asked for my view after President Obama surprised the markets by urging adoption of what he called the "Volcker Rule" on 21st January, I have said that it would be bad for the stock market in the short term, due to uncertainty over banking profits, but good over the longer term as it would help to restore confidence in the sector. In the short term, many stock markets are now over sold, including Wall Street.

I feel more strongly about the latter, longer term point today because I sense that Volcker's plan is gaining credible support, increasing the chances that it will be adopted. If so, and at the risk of sounding melodramatic, this could save the Obama presidency and more importantly, mark an initial and positive turning point for the US economy which I had previously and frequently described as, sadly, being at the epicentre of global economic risk. However staggering debt problems remain, as we all know. (Note: an Archive Search - 5th link, upper left - under 'epicentre' will produce 35 results, mostly related to the US economy.)