The meaning of Paul Volcker's comeback
In the opening chapter of his great history of the Federal Reserve, Secrets of the Temple, William Greider describes Jimmy Carter's choice of Paul Volcker as Fed chairman in 1979 in epochal terms:
At that moment, few in the White House appreciated what would become obvious in the next few years, that this was the most important appointment of Jimmy Carter's Presidency.
What the President also did not grasp was that he was inadvertently launching a new era and ceding his own political power. The choice had occurred by accident, driven by political panic and financial distress. In time, it would profoundly alter the landscape of American life, transforming the terms for virtually every transaction in the national economy and the world's, creating a new order.
Barack Obama's choice of the now 81-year-old Volcker as chairman of his new Economic Recovery Advisory Board isn't nearly that big a deal. But given Volcker's history, it is awfully interesting.
In 1979, inflation was running in double digits and bond investors had lost all confidence in Washington's ability to get it under control. By grudgingly appointing Volcker, then the president of the Federal Reserve Bank of New York (the job that Treasury-Secretary-in-waiting Tim Geithner holds now), Carter reassured markets and, it turned out, put monetary policy in the hands of somebody who was willing to sacrifice just about anything--including Carter's job and those of millions of other Americans--to get inflation under control. In Greider's telling, it was the beginning of an era where Wall Street called all the shots.
That era now seems to have come to an end in another period of "political panic and financial distress," and yet here is Paul Volcker again. He's been advising Obama for months. There was even talk that he might get the post of Treasury Secretary. What does his presence in the Obama camp mean?
Obviously the appointment is meant partly, just as it was in 1979, to reassure markets. Somebody investors trust is, if not in charge, at least standing at the President's side.
But I'd like to think there is more to it than that. Volcker is not an economist, but he seems to have internalized far better than most economics Ph.Ds the lesson that there is no free lunch. That's my interpretation--a more generous one than Greider's--of Volcker's brutal stand against inflation from 1979 through 1981. In the 1960s many economists had come to believe that inflating the currency was a simple and relatively safe way to keep the unemployment rate down--that is, a free lunch. Volcker put an end to that failed experiment.
More recently, Volcker has been outspoken about the dangers of budget deficits and looming long-term commitments to Social Security and Medicare. He has worried a lot about U.S. dependence on capital flows from abroad. He has also studied how financial regulation should be organized in the future, although he's hesitant to draw any strong conclusions just yet. Basically, he has been the voice of prudence and of discipline in an era largely devoid of both.
Whether he'll be a truly influential voice in a new administration that's planning to throw hundreds of billions--maybe even trillions--of dollars at the economy to keep it from collapsing is something we'll find out over the next couple of years. But for now his role in the Obama team at least exudes the reassuring vibe that maybe the grownups are about to take charge.
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1
Your reference to William Greider makes the Volcker choice even more interesting. Greider just wrote a scathing column about the Rubinomics bunch in which he implicated Obama's choice for Treasury in the Citigroup fiasco & his choice for National Economic Council Director for the whole darned mess. There will surely be a battle of wills in the West Wing come January.
The Greider piece is linked on http://www.RealityChex.com (about half-way down the center column). Greider also got the "quote of the day" yesterday.
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2
Volcker is simply a return of a voice of reason. He is the anti-Greenspan put. Further, I think he serves another function. Critical function, at that.
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When we are done with all of this spending, we are going to be faced with one heck of a bill and one h3ll of a raging economy. Thing GDP at 5% well above controlled growth. He will be the voice of reason to the fed to break the back of inflation if necessary....that is if we aren't stuck in a deflationary spiral first.
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As an aside, Paul Abrams has an interesting article on how to fix the housing part of the crisis in one fell swoop on Jan. 1, 2009!!
See here: http://www.huffingtonpost.com/paul-abrams/january-1-2009-the-magic_b_146324.html
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Happy Thanksgiving!! -
3
Yes,grown ups would be nice. We need fiscal discipline, real discipline which may mean sacrifice in the short term. Greenspan could never get that through his head.
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4
The Federal Reserve System must be abolished
First off, government programs were enacted in order to convince banks to over extend themselves to consumers. Consumers were encouraged by artificially low interest rates to borrow more than they could afford.
These loans that were created were then bundled up and sold to investors around the world. These investors, to guarantee their invested money should these bundles default, also bought insurance to cover their bets.
The consumer, who is underwater in debt, defaults on the loans they were encouraged to take. Insurance companies that provided insurance did not have enough money to cover the payments and had to ask for help from the Fed.
Banks that held these bundles now have no income from these portfolios and are asking for help from the Fed.
Banks can't lend out to companies as their income has halted and those companies that only survive because of credit are calling to the Fed for help.
So now government needs to encourage more borrowing by the consumers who cannot afford to make payments?
To paraphrase, Einstein famously said that doing the same wrong things over and over is the definition of insanity.
The Keynesian economics of interference in the markets is utterly discredited. In order to afford these bailouts The Fed just prints, like counterfeiters, hundreds of billions of dollars to "encourage" banks to, at the very least, start loaning to worthy borrowers again.
Idiocy. While we're at it let's spark hyperinflation in order to "calm" and "encourage" bankers and speculators?It is long past time to sweep away the entire Federal Reserve and it's fiat currency system, and return to sound money based on commodities such as gold and silver. Study the School of Austrian Economics for the true "change" that is need to fix this mess.
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5
We are already in a deflationary spiral. You can see exactly what's happening by looking at the price of gold:
http://www.goldprice.org/gold-price-history.html#10_year_gold_price
Gold is the most stable commodity. The vast majority of all gold ever mined is still part of the current supply. So the total supply grows very slowly.
The changes in the price of gold are really telling us what's happening with the dollar. After many years of inflation, we are now in deflation.
Stability is what we need. Tying the value of the dollar to a fixed quantity of gold, the way it used to be before Nixon started the inflation cycle by taking us off the gold standard, is an essential first step.
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6
I'm intrigued that there's no mention in the media coverage of the Volcker choice of his role as Fed Chairman in the change in mortgage markets in the early 80s (changes that arguably were the unintended prelude to the blindingly complex mortgage asset markets we are now stumbling around in today).
When Volcker used monetary policy to "wring out inflation" in the early 80s, one effect was to raise interest rates to very high levels. Thus, at that time, to choose one example, short term CD rates went to 15 to 18 per cent levels. S&Ls (which at that time tended to hold mortgages as assets ) found themselves having to fund the 6% mortgages on their balance sheets with these very expensive short term liabilities -- that's what banks do, borrow short and lend long. This maturity mismatch really whacked the income and balance sheets of the S&L industry, which led to legislation "freeing" the industry from a lot of the regulation that had existed before. This change, along with the go go environment in real estate markets in the mid 80s (when oil prices were falling a lot), culminated in the S&L fiasco of the late 80s, which was kept on the back burner during Reagan's final years and was addressed by Bush 1.
So Volcker was there at the start and looks to be in the room again, at what will hopefully be the end.
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