Paul Volcker: 1927-2019

The legendary chairman of the Federal Reserve (1979-87) passed away few days ago on 8th December 2019. He was 92. I had read his book, ‘Keeping at it’ this year and blogged on it here, posting some extracts from it. It was a good book but not a very exciting one. I read few of the tributes posted for him. The Financial Times stuck to the theme of using the occasion to bash the curent American President. John Taylor was conventional too. I found Greg Ip’s tribute somewhat interesting.

While praising Volcker, he held out the possibility that Volcker was not as austere nor dogmatic/rigid/doctrinaire as often made out to be. Therefore, he would have taken the same decisions that his successors like Greenspan Bernanke and Yellen took in their years at the helm of the Federal Reserve Board. That is quite tongue-in-cheek. He cites this observation once made by Mr. Volcker as support for his conjecture:

In 1989, two years after stepping down from the Fed, Mr. Volcker attended a conference of economists in Cambridge, Mass., on financial crises. Mr. Volcker warned the attendees that policy makers, by repeatedly intervening, could be “reinforcing the behavior patterns that aggravate the risk in the first place.” Then, revealing how he felt torn between the urgency to act and the avoidance of moral hazard, he related that as head of the Fed’s New York district back in the 1970s, “I often said to myself, ‘What this country needs to shake us up and give us a little discipline is a good bank failure. But please, God, not in my district.’”

This episode does not prove that Mr. Volcker would have succumbed to the moral hazard and would not have allowed a shake-up to happen, discipline to be instilled through a bank failure, even if he wished that it would not, happen in his District. That is par for the course for human nature. We are capable of holding two contradictory thoughts in our heads.

Paul Volcker clearly did not mind engineering two recessions – nearly back-to-back to quell inflation. As we have learnt over the years, taming inflation is easier than stoking it, for there is no ceiling to raising the interest rate but there is a floor and that is 0.0%. Of course, breaching this floor has brought with it unintended and often unpleasant consequences. We have not seen the end of them yet.

Mr. Volcker did not give an exalted place to financial innovations. He called the ATM the best financial innovation ever. That said, ironically, his taming of inflation and allowing the long-term bond yield to commence a secular decline paved the way for financialisation. As interest rates declined, so-called financial innovations deploying leverage flourished.

All that being said, the world is poorer for his demise. One upright man – a man who combined integrity with competence – less in this world.

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