Volcker is celebrated as the Federal Reserve chairman who broke the plague of global inflation in the early 1980s. But he did it be engineering a violent crackdown on excess credit. Why a ’Burkean’ conservative can support this Democratic nominee.
Image has not been found. URL: /wp-content/uploads/2008/10/obama-volcker-21.jpgPaul Volcker and Barack Obama at the center of a panel in Lake Worth, Fla. that includes, from left to right, Gov. Bill Richardson, Gov. Jennifer Granholm, small business owner Victoria Villalba, Gov. Ted Strickland and Google CEO Eric Schmidt (Flickr: Bridget DeVries)
The announcement that Paul A. Volcker is a key economic adviser to Sen. Barack Obama – cited by the Democratic presidential nominee during the last debate and appearing with him at a campaign event in Florida last week — was met with surprise in some circles.
Volcker, 81, is celebrated as the Federal Reserve chairman who broke the plague of global inflation in the early 1980s. But he did it be engineering a violent crackdown on excess credit — at one point the short-term bank rate jumped to 20 percent — and the 1982 drop in gross domestic product was one of the sharpest in the postwar era.
Volcker is certainly no liberal. He was appointed to the Fed in the last year of President Jimmy Carter’s term — but with a visible lack of enthusiasm. Carter insiders called him the “the candidate of Wall Street.” Double-digit jumps in consumer prices were destroying financial markets, and Volcker was the sheriff whose job was to restore order.
Volcker’s brand of conservatism, however, is far different from the quasi-religious, free-markets ideology espoused by the former Fed Chairman Alan Greenspan and the recent crop of Wall Street barons. Though Volcker had refrained for two decades from criticizing the policies of his successors, he unleashed a blistering, and wide-ranging, criticism in an April speech at the Economics Club of New York.
The most reported section of his speech was the criticism of the forced merger/bailout of Bear Stearns, which Volcker said took the Fed “to the very edge of its lawful and implied powers.” He forecast that it would “surely be interpreted as an implied promise” to do the same for everyone else. And the Fed has duly increased its unorthodox lending by about $800 billion since Volcker spoke.
Volcker’s harshest words, however, were not directed at current Fed policy — he fully acknowledged the gravity of the crisis — but at those of Greenspan, the erstwhile ‘Maestro’ of Wall Street. For it was Greenspan who proudly presided over the Hindenberg-like bubble that officialdom is struggling to cope with. The “bright new financial system,” as Volcker called it, “for all its talented participants, for all its rich rewards – has failed the test of the market place.”
And he went on: “[T]oday’s financial crisis is the culmination, as I count them, of at least five serious breakdowns of systemic significance in the past 25 years — on the average of one every five years. Warning enough that something basic is amiss.”
“It is hard to argue that the new system has brought exceptional benefits to the economy generally. Economic growth and productivity in the last 25 years has been comparable to that of the 1950’s and 60’s, but in the earlier years the prosperity was more widely shared.”
Image has not been found. URL: /wp-content/uploads/2008/10/volcker.jpgPaul Volcker (barackobama.com)
Volcker lamented the passing of the banks and insurance companies where employees and partners shared pasts and futures, and expected to live with their loans for many years — unlike today, when garden-variety credits are chopped into anonymous pellets, grist for the complex bonds and derivatives that have spread financial havoc throughout the world. Volcker left no doubt that it will take strong leadership, not blind reliance on markets, to restore order.
Volcker’s conservatism fits into the institutionalist tradition of the great Irishman and British parliamentarian, Edmund Burke. It has nothing to do with the Ayn Rand-style of market libertarianism that mesmerized Greenspan.
Burke’s traditionalism is easy to mock — he could not imagine Britain without its royalty and opposed Irish independence. But, remarkably, he was also the leader of parliamentary support for the American Revolution. He came to that position, he said, only because the obstinate mismanagement of the American question by the king and his party had made the “Colonies, who were once not only submissive, but most affectionate to their Mother Country…totally estranged, discontented, disobedient, riotous…and almost rebellious.”
Volcker’s embrace of Obama may be such a Burkean moment. At the conclusion of his April speech, Volcker was asked whether it was true that he had actually endorsed Obama for president. He said it was indeed true and gave his reasons.
“I do have some fairly strong feelings,” Volcker said, “and I don’t like the direction this country has been going in for some time, in many directions. Economics may be part of it, but it is only a small part of the problem….
“People have been taking surveys of American people every year for years. One of these things where they ask the same question. Do you trust your government to do the right thing most of the time? Not a very tough examination…..20 or 30 years ago, the positive response was 70 percent. Now the positive response is 25 to 30 percent. I think that tells you something.”
And it tells you even more that not only would a man like Volcker make this statement, but that he and Obama have developed a clear affinity of views.
Charles R. Morris, a lawyer and former banker, is the author of “The Trillion Dollar Meltdown: Easy Money, High Rollers and the Great Credit Crash.” His other books include “The Tycoons: How Andrew Carnegie, John D. Rockefeller, Jay Gould and J.P. Morgan Invented the American Supereconomy” and “Money, Greed, and Risk: Why Financial Crises and Crashes Happen.”
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