When: Today, Thursday, Nov. 29, 2012

Where: CNBC's "Squawk Box"

Following are excerpts from the unofficial transcript of a CNBC EXCLUSIVE interview with former Federal Reserve Chairman Paul Volcker today, Thursday, Nov. 29th at 6AM ET on CNBC's "Squawk Box" (M-F, 6-9AM ET). Additionally, here is a link to embeddable video of the interview:

All references must be sourced to CNBC.



PAUL VOLCKER: Well, I don't know why we haven't gotten this new regulation out. And, you know, there were some little carve outs of legislation at the last minute. But I think it's-- it's effective the way it's stated. And stated pretty broadly in the law. Whether the regulation has to be as complicated, I don't know what the new regulation will be, but I don't think it needs to be as complicated as our initial regulation, which got a big reaction.

ANDREW ROSS SORKIN: Are you frustrated by that?

VOLCKER: No, not particularly. I think in effect it's been effective. Banks have stopped their straightforward proprietary trading operation. And the only question is how much proprietary trading might get mixed up in their market making and customer trading. They've largely cut back on their hedge funds and equity funds. Was there a little more leeway in the law at the last minute than I would've preferred, just because it makes it a little messy.

But basically, that's accomplished. And, the outright trading is accomplished. And as the managements and the directors finally understand that yes, this is a law that has to be followed, they'll be able to manage their trading desks I think in an effective way.

SORKIN: Were you surprised at how aggressively the banking industry fought back against the Volcker Rule and some of the things-- that people said, both about the rule and frankly, about you? And I think of some of the comments that people like Jamie Dimon made.

VOLCKER: This is not just the banking world and the world of finance. But it's always been true. And it's just gotten accelerated with the amount of money involved, that once the lobbyists get their teeth in it, they fight harder than the managements that may have hired 'em in the first place who, yes, wanted to do something, but it's one of many issues they have.

You give it to a lobbyist and say, "Do somethin' about the Volcker Rule. Do somethin' about Dodd-Frank," you got 400 lobbyists down there making a living doing this. And the whole thing kind of gets put out of context. I asked the banks, you know, you got a different approach in England, in particular, and potentially in the continent of Europe to separate out all the investment banking functions from the commercial bank, and keep 'em in the same holding company, but have a wall between them. Ring fence. Wall sounds stronger to me than a ring fence. But then they have to decide-- they realize they can't disentangle it entirely. And then they have to say, "Which transactions can cross the border or jump the fence? And which can't?" They've never really defined that yet. And I don't know whether they can sustain that decision. It's another approach toward the same problem, including the cultural problem.


VOLCKER: It's in a state of transition. And it's been somewhat chastised. It's beginning to act a little more normally now I think and beginning to make loans again, which is a good thing. But I hope some lessons have been learned. We got a lot of complicated new laws, new capital requirements, and all the rest, which you've got to settle down. We've got to complete the Volcker Rule, that's very important. But the most important single thing which I think needs to be dealt with in convincing way, it's in the law, but it's got to be in other countries' laws too, what do you do with a failing, large financial institution? And there is a procedure set out in Dodd-Frank that says you've got a failing institution, that institution will, in the end of the day, be liquidated, and stock holders will lose and management will lose, but liquidating might mean it's merged or pieces of it sold off. But the government will take it over and provide some transitional support to maintain continuity in markets. But in effect you'll go through a modernized bankruptcy procedure. And that is met with a lot of skepticism in the market.


VOLCKER: Well, I think you could make that argument. But it's kind of a silly argument. You're not gonna conduct a monetary policy that you think is harmful to the economy, and hoping that it brings some pressure on somebody else. I mean, I think that's unrealistic. They conduct a monetary policy, rightly or wrongly, they think appropriate for the circumstances as they see it, and they're not gonna do something different because they think that may somehow hasten fiscal reform.

SORKIN: Do you think it's appropriate?

VOLCKER: Yeah, I think it's appropriate that the--

SORKIN: The current policy?

VOLCKER: Well, that's a different question. I mean, whether it's-- whether it's appropriate on its merits, and I don't like to comment on current policy. I only get a little nervous when they keep promising that they're gonna maintain it forever. Exaggerating, but-- I think you have to be ready to make changes when the classic problem of the Federal Reserve is always do you tighten up soon enough. When the process of inflation and a boom and a bubble are just beginning, 'cause that's when it's hardest to do it. Anybody-- when the economy is already in excess and you tighten up, it's too late. Definition. But it's very hard to anticipate.

SORKIN: Do you think they will?

VOLCKER: I hope so. They keep saying so--

SORKIN: Do you think that you would know when to go? You think you'd know when to make a move--

VOLCKER: Oh, I, of course, would know when. But I'll be dead by that time. No, it's a very hard judgment to make. Sometimes you'll be wrong. But you've got to-- I think that is the chronic problem of any central bank because the implication is you have to begin tightening before the excess demand, before the bubbles, before the inflationary process is under way because it's morning difficult if you're too late. But if you do it, by definition, people are gonna complain. "Why are you removing the proverbial punch bowl before the party's really gotten drunken?" But that's what I what a responsible host does. He waters the punch bowl in time.

SORKIN: It sounds like you would take the punch bowl right about now.

VOLCKER: Yeah. About now? Oh no.

SORKIN: Not yet?

VOLCKER: Not yet.


VOLCKER: It's hard to think they won't take care of it one way or another. I think there are kind of unrealistic expectations. You've got to have a fix for that. And I think the problem is making it credible, particularly on the expenditure side. And part of the deal has to be realistic restrain on expenditures, they're going to take place way off in the future. Now, how can you be-- how can you be sufficiently realistic about that? But I think we need a big reform of the tax system. And we do need reform in social security. We're going to need some changes in Medicare. We're going to need restraint on other spending. You can't do that in three weeks.

SORKIN: So do you think we go off the fiscal cliff?

VOLCKER: No. All you gotta do is-- you know what you gotta do on the tax side, that's simple. You gotta pass a law that says the present law has to be overridden. And every—the only argument is whether it's overridden for people over $250,000.

SORKIN: And-- and what would be your position on that?

VOLCKER: Oh, I think the simple thing to do-- obviously do what the president's saying and he ran a campaign on it. There's some legitimacy there. That's-- if you gotta act in three weeks, you're not gonna revise the whole Income Tax Code in the next three weeks. All this business about deductions may be perfectly legitimate. And-- I think that both income taxes, personal income tax and corporate income tax, need a lot of thought and a lot of revision. They're both broken. But you're not gonna do that in three weeks. The challenge that I see is in three weeks you've gotta have some convincing balance of the tax side, the revenue side, with the expenditure side. It's inherent. You can't change the expenditures in three weeks. You can-- you can indicate intentions. But you can't--

SORKIN: So what do you think happens, then?

VOLCKER: Well, I think you get some understanding about a kind of framework for dealing with the expenditure side.

SORKIN: But you think we come up with a framework?

VOLCKER: Oh, well, I think they have to--

SORKIN: You lived in Washington, is pos-- is it very-- and there are--

VOLCKER: Well, there--

SORKIN: --people who are saying we should go--

VOLCKER: It's gotta--

SORKIN: --into January--

VOLCKER: --it's gotta be some kind of a credible framework. How to make that credible is a big problem.

About CNBC:

ith CNBC in the U.S., CNBC in Asia Pacific, CNBC in Europe, Middle East and Africa, CNBC World and CNBC HD , CNBC is the recognized world leader in business news and provides real-time financial market coverage and business information to approximately 390 million homes worldwide, including more than 100 million households in the United States and Canada. CNBC also provides daily business updates to 400 million households across China. The network's 16 live hours a day of business programming in North America (weekdays from 4:00 a.m. - 8:00 p.m. ET) is produced at CNBC's global headquarters in Englewood Cliffs, N.J., and includes reports from CNBC News bureaus worldwide.

CNBC also has a vast portfolio of digital products which deliver real-time financial market news and information across a variety of platforms. These include, the online destination for global business; CNBC PRO, the premium, integrated desktop/mobile service that provides real-time global market data and live access to CNBC global programming; and a suite of CNBC Mobile products including the CNBC Real-Time iPhone and iPad Apps.

Members of the media can receive more information about CNBC and its programming on the NBC Universal Media Village Web site at