Seth Wenig/AP Photo
Paul Volcker, seen here in March 2009, had a second act advising President Barack Obama, and was critical of the financial engineering that would lead to the collapse of 2008.
Paul Volcker died Sunday at the age of 92. The press has been filled with lavish praise of his statesmanship. Here are a few things you need to know.
First, in his favor, Volcker was the rare senior government financial regulator who viewed his work as a public calling, not as a pit stop between lavishly paid jobs in the financial industry. His first job after graduate school was as a staff economist at the New York Fed. After a stint at Chase Manhattan early in his career, he worked mostly as a public servant, first at the Treasury in the Nixon era and then as chair of the Federal Reserve, and later as a much-abused adviser to Barack Obama.
Volcker was basically a conservative, but a principled one. In this era, that passes for nobility.
There are really two Paul Volckers worth remembering. The first was the man who “broke the back of inflation” far more brutally than necessary in 1979. It was late in the Carter presidency and the Fed chair was the hapless G. William Miller. Inflation was soaring. Carter replaced Miller with Volcker, who was then serving as chair of the New York Fed Bank.
Volcker’s strategy was to put interest rates through the roof and to create a deep recession. Rates soared as high as 21.5 percent. Unemployment quickly rose to 10.8 percent. Small businesses, construction, retail, and manufacturing industries (already reeling from import penetration) were all devastated. Union bargaining power was clobbered. The high dollar interest rates also ruined the economy of Latin America, whose nations had been persuaded to take out loans in dollars to pay for more expensive oil imports as part of “petrodollar recycling.”
Among the other casualties was the man who appointed Volcker, President Jimmy Carter. His presidency never recovered from the Volcker recession.
Testifying before the Joint Economic Committee in October 1979, Volcker flatly declared, “The standard of living of the average American has to decline. I don’t think you can escape that.”
Volcker later told The Wall Street Journal, “I’m not sorry about it. … I don’t know any other course of action that would’ve been politically feasible or economically feasible.”
In fact, other courses were available. The inflation of the 1970s was not your typical macroeconomic inflation produced by overly fast growth or tight labor markets. Rather, as progressive economists observed at the time, the inflation was sectoral—artificially high oil prices courtesy of the OPEC cartel, rising prices in the medical sector thanks to a Medicare compromise that allowed doctors and hospitals to charge as much as they liked, housing inflation as people looked for investments that would hold their value, and food inflation due to the accident of several bad harvests.
If the cause was sectoral, the cures should be sectoral. This was the argument of economists Jeff Faux and Gar Alperovitz, who ran a small think tank that would later merge into the Economic Policy Institute.
But as Fed chair, Volcker had only one blunt instrument—interest rates. In that period, one of the dynamics of inflation was the so-called wage-price spiral. Prices rose and wages followed, causing prices to rise again. But that was an effect, not a cause. Other liberal economists of the era had been calling for what’s known as “income policies” in which both labor and management would agree to price and wage restraint. But that was also not of interest to Carter, his conservative economic advisers, or Volcker.
So we got deep recession, and then Reagan—who reappointed Volcker chair of the Fed in 1983, but then replaced him with the even more conservative Alan Greenspan. Volcker, in semi-retirement, chaired several influential international commissions.
Fast-forward two decades to Volcker II, the aging statesman in the Obama era. In 2007, Volcker began advising Obama and endorsed him early, in January 2008. Volcker, to his credit, was critical of all the financial engineering that would soon lead to the collapse of 2008. Still vigorous at 80, he was a natural to be Obama’s secretary of the Treasury.
But the pro–Wall Street people advising Obama found Volcker far too independent.
He had never been in favor of the repeal of the Glass-Steagall Act separating commercial from investment banking. He had become a critic of all the conflicts of interest in the financial industry, and wanted to prohibit banks from investing in hedge funds, private equity, or engaging in trading of securities they created. He flatly called for breaking up the large banks.
So when Obama turned to Tim Geithner and Larry Summers to lead the response to the financial collapse, a powerless but important-sounding job had to be found for Volcker. The administration cynically created something called the President’s Economic Recovery Advisory Board, chaired by Volcker. It seldom met and had zero influence. Volcker was in a kind of internal exile.
In January 2010, reeling from the failure of his program either to repair the financial system or to produce an early recovery, Obama again needed the symbolism of Volcker’s blessing. So Obama decided to support a measure for which Volcker had long been crusading—a ban on banks trading on privileged information for their own accounts. Obama called for the measure to be included in the pending Dodd-Frank Act, and dubbed it the “Volcker Rule,” holding a press conference with the old man. Nobody was more surprised than Volcker. A weak, ambiguous version of the rule made it into the final law, and banks continue to find ways around it.
Volcker’s improbable odyssey, from the Scrooge of Wall Street to the scourge of Wall Street, was admirable. His later life, as a kind of regulatory progressive, can be seen as a kind of redemption for the earlier damage that he did in creating the postwar era’s only engineered near-depression. Alas, Volcker had far too much influence in his first incarnation—and almost none in his second.
