Surveillance Special: Paul Volcker's Legacy

of Paul Woker has died here. I can't convey, folks, the courage, the intellectual courage of Paul Worker in the crucible of the late nineteen seventies and into the early nineteen eighties. There is no precedent in our financial history with an important report or Bob Moon is a friend. When Saturday Night Live made fun of Jimmy Carter's inflation headaches in the late nineteen seventies, it was rapidly becoming

no laughing matter. In the two thousand, trans continued, the average blue collar annual wage in this country will be five hundred and sixty eight thousand dollars. Good evening prices in the United States during the first three months of nineteen seventy nine went up at an annual rate of That was the year Paul Woker became Chairman of the Federal Reserve. He would go on to be credited with breaking the back of inflation with some very tough medicine.

Under the Carter and Reagan administrations, Voker cranked interest rates ever higher to stem rising prices and slay an inflation monster. He talked about it years later in a retrospective for

the Federal Reserve. I do think there was a feeling in the country then that there was something of an emergency that had to be dealt with, had to be dealt with by forceful action, and that kind of common sense reaction that there would be a little pain and impressss who struggled through those times would argue that a little pain is a gross understatement. The prime lending rate

went to twenty one and a half percent today. Before this week, it had never an American history been above twenty Volker was vilified in some quarters for the impact of those borrowing costs on businesses. There was a cement company that used to put ads, full page ads in the Wall Street Journal, sculling crossbones under my name or under my picture or whatever, and they kind of rankled.

The outcry at the time was widespread. Farmers protested by blockading the FEDS Washington d C. Headquarters with their tractors. Home Builders and carpenters wrote Volker's name and fed address on sections of two by four lumber and mailed them complaining they had no use for wood since no one was buying houses. The pain was also felt by carmakers. The price of the car is bad enough that the interest rate is ridiculous. Ultimately, though Vulker's tough medicine cured

the inflation problem. The inflation numbers from three came out and they were the lowest that they have been since nineteen seventy two, three point eight percent. That's down for more than twelve percent in nineteen eighty and by the end of nineteen eighty six, the consumer price index had settled down to one point one percent. The achievement laid the foundation for the economic expansions presided over by his successors,

Alan Greenspan and Ben Burnike. Folker would quip that the best new financial product in recent decades was the automated teller machine and scorned financial industry innovations such as credit default swaps, mindful of the risks of the free market. Financial crises have been a recurrent feature of free and open carpital markets, not reached in the United States the forty years of relative cran quality, where the exception up

the norm. Foker established a reputation as something of a one man economic cleanup crew, called upon early in his career at the Treasury Department to devise a successor to the gold Standard, and again, as the nation was struggling to pull out of the worst financial crisis since the Great Depression, he counseled Barack Obama as head of the Economic Recovery Advisory Board, proposing a simple, common sense reform which we're calling the Vocal Rule. After this tall guy

behind me. Banks will no longer be allowed to own, invest or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit unrelated to serving their customers. We cannot accept a system in which shareholders make money on these operations if the bank wins, but tax bears for the bill if the bank loses. When Vocal first proposed banning speculation by federally insured banks in two thousand nine.

He did it in one paragraph. Four years later, the nation's regulators issued a rule based on Volker's idea that ran close to one hundred pages. Ultimately, much of the so called vocal rule was rolled back, but he continued to counsel against in anything goes approach that just doesn't fly. And that's where we were, and that's what broke down. Paul Volker, who stood six ft seven, was a giant of the financial world through a career that spanned more

than half a century. He was ninety two years old. I'm Bob Moon Bloomberg Radio. Thank you so much. Just just extraordinary well done. How Bob does that? We are so fortunate to have a former chairman of the sec

joint us Arthur Lovitt joins us now on chairman Broke Voker. Arthur, I know you stood at lunch is, breakfast, dinners and insecurities meetings listening to the impossible to accomplish theories of Paul Woker, how gauge for us colored for us, if you will, the absolute doubt that he could bring inflation down. I think his policies, which were the right policies at the time he issued them and spoke about them, there was enormous skepticism and the financial community, and my personal

experience with him was that I believed him. I believed in him, and I was very vocal in my support for him, and he never forgot that. Uh. This goes back nearly thirty years, and it's hard to imagine how how much he was criticized for raising interest rates to those levels. And Volca was a very straightforward, plain man who spoke uh in plain, direct English. There was absolutely no artifice, no guile, no game playing. He was straightforward,

upright and decent. He was as decent a person as I've known in my whole life, and I was blessed by the experience of having known him. He's been complicated, straightforward. I like that. I like that Arthur uncomplicated. Out of tea Neck, New Jersey, a pretty basic up ringing. His father ran the government of te Neck for a while, there was a mnicipal manager. But what I always felt Arthur is so many people missed his absolute prodigious academics.

His command out of Princeton of the material to me, was the foundation of his courage. He was. He was truly The depth of his perspective was just extraordinary. Was

that evident in those great battles of the late seventies? Yes, it was very evident that this was a man who spoke without artifice, without gyle, with none of the embellishments of the typical financial commentator of the period, and he spoke in such direct terms that the average citizen could easily understand what he was driving in and what he was about. Arthur, give us a sense, take us back

if he would back to those late seventies. What kind of support, if any, did fed Chairman Vulker see from the broader financial community for his actions to try to reign in inflation. He had some support, but it was limited. It was by no means a public outcry on his behalf. There were relatively few people who were outspoken in their supportive Paul Vulcar, but he deeply appreciated whatever support he got and maintained those as his most important relationships later

in life. He was an incredibly loyal individual individual throughout his public and private lives, and his friendships were deep and sustaining. He shared an office with a man named Dick Ravit Yeah, and the two of them were close up until the time that that Vulcar passed away, and he maintained similar relationships with a number of people throughout his life. And these were not people that were necessarily the most well known. They were people who he valued

for their support and their friendship and their intelligence. Arthur, we are so thrilled that you're with us today, Arthur Levett, the former chairman of the Securities and Exchange Commission. We're now working to get a number of guests. I'm thrilled to tell you that John Writing of RDQ Economics schedule to join us here. Uh in a bit, if you're just tuning in. The former Chairman of the Federal Reserve, Paul Woker, his dead at ninety two. He's been extremely sick.

Paul extremely sick over the recent months. This is to all of his friends and acquaintances of those walks around the Upper east Side that you see him on. This has not been a surprise in coming not been a surprise. But as Bob Moon so uh, you know, elegantly put and Arthur Levitt that commented as well, just an extraordinary career in an out of public service. And you think back, which it's hard for us to do. When you look at inflation right now at one you know some of

those double digit numbers, it's just extraordinary. Well it was, and it was the courage of lifting rates to break it in the intellectual foundations and debate of that we're as great as anything that we have today. Paul Workers dead at ninety two. He has been very very ill. This has been widely expected among the economics community, in the New York financial community as well. We continue our coverage Paul Sweeney in New York. I'm Tom keenan London.

Were thrilled to Diane swonk as with us, with Grant Thornton on short notice, and of course our Michael McKee joins us as well. Michael, of the group here, you're the only one like me old enough to remember this agony. Diane Wark was far too young. What were the theoretical underpinnings to Paul Worker's courage? Were they evident? No? Not particularly.

But he came in and he changed the monetary policy regime of the Fed to target the money supply, which he said gave them two advantages when it was a simple message to convey what they were doing. And he said it also created an internal discipline within the FED. I think there's a third thing that it did that he wouldn't exactly say, but it it confused the markets in the sense that, um, you had to uh focus on the money supply as opposed to the level of

interest rates. That was the secondary effect. And so he didn't just come in and say I'm raising rates. They targeted the money supply. Therefore freights went up. Wasn't the FEDS fault? People still felt it was the FEDS fault, but but it took some of the pressure off diets walk. This is fast and at as Mike shows the fixation of M one, M two, M three, and I'm gonna call the Chicago thought. Uh. Ages ago you were at Michigan with a much more holistic economics. As well as

you've studied the courage of late Paul Volker. What was the distinction that he executed in the late seventies and

into the early eighties. Well, not only did he dissent and he voted against some of the stimulus that brought us the stiflation of the latter part of the nineteen seventies, he had the independence in fortitude to break the back of inflation in the back to back recessions of and a galaxy far away, far away, when we still had inflation and ruining purchasing power, and people really forget how

corrosive and damaging that period was. And what's really important to remember is when you turned this picket back on, when he was done breaking the backup inflation, the economy recovered in a way we've not seen since. There is an ability that then but not only stop inflation, which we have more tools to do, but also to reignite growth in the nineteen eighties, and I think that's very

important as well. Also, Paul Boker had to resign. He was pushed out at the Federal Reserve because of his um backlash to deregulation in the financial services industry, and Alan Greenspan was chosen as someone they thought at the time was a political lackey that would be easy to manipulate. They were wrong about that as well, they later found out.

But I think that's very important to remember as well, that Paul Boker fought many of the deregulation any things that some people believe contributed to the financial crisis in two thousand and name so, Michael McKee One of the things that the FED has to deal with today is political pressure coming from the White House administration. Take us back to those late seventies early eighties when former FED Chairman Volker was, you know, working with the economy and

the result was indust rates going much higher. How much support and our pushback did the FED have to deal with him? Interestingly enough, he didn't get a huge amount of pushback from the Carter administration. Jimmy Carter had put him in there to do something about inflation. Uh, so nothing like what we see today. But he did get a lot of pushback from industry and consumers. We had been builders, homebuilders delivering crates of two by fours to

the FED in protests. There were death threats. He had to have a guard assigned to him. So it wasn't an easy time at all. Uh. And of course anybody who applied for mortgage in those days was that it wasn't it wasn't a good time. When you create a couple of recessions, Uh, you are definitely putting your career and your reputation on the line. Diane, As we look back now at some of the FED chair people to chairman to succeed Mr Vulker, what do you think his

legacy was for those that succeeded him. Well, you know, it's really interesting is even people you know, people like Janet Ellen who was working at the Photo Reserve of the nineteen seventies during this day inflation, or Stan Fisher, who's your same age, who also was working as an

economist in the nineteen seventies. There was a legacy that we saw that came out of that era, a fear of going back to that kind of inflationary problem, and it's part of the reason why you saw so many different views about what should happen in the way that the crisis and fears that inflation would come back. Now those fears proved wrong, and that it's a different era

with different dynamics. But I think it really is important that he forced people to think hard about what the consequences of that action the day could be down the road. And Dan swak there's a photograph of President Reagan and this is the Reagan that Michael mckeennew before ray Vic with Chairman Vulker. I'm guessing and the accessibility of this exceptionally smart individual was just extraordinary. I think of one of your great mentors Ned Graham, like at Michigan the wait,

his accessibility to me was truly second to none. He really was accessible. And you know this is remember there were stories written about him to smoking his cigars and how kind of he lived his life in a very low key way. This is not someone who considered himself

out of an ivory tower in any way whatsoever. And I think I remember reading those stories in school and thinking, you know this, I mean, he was someone to be revered and someone to be admired given what was going on and in industry, as Michael pointed out, I mean I was in the heart of the auto industry that was taking the burn of this. Remember just miles north

of me when I was in Ann Harbor. Unemployment rate and flot Michigan went up above twenty five during this era, So you know, it really was a difficult time to be in his position, and he handled it in in a totally unique way and being a human being. Now we are out of time. This has been wonderful. Michael McKeith, thank you so much for joining us out of all of our economic coverage Bloomberg Radio, Bloomberg Television, diet swamps. Thank you so much for joining us with Grant Thornton.

I just really extraordinary. Today Chairman Voker has died ninety two years old. Paul Woker has been grievously ill for some months now. This is not a surprise to the economics community, but nevertheless it marks a significant passing. We are thrilled now to bring you John Riding of rt Q Economics, who has an underlying theory which so much links to the theory of Paul Boker. John, I am thrilled you could join us. This was not Keynesian theory

neo Keynesian theory. It was a belief in the foundation of interest rates, the linkage to money. It goes back to Irving Fisher f I s H. E. R. Moving forward even to the textbooks of Stanley Fisher. The former vice chairman, described for us the monetary fervor of the

seventies that led to vocals courage. Well, I think it's very difficult in these low inflation times for people who are much younger than you and I to even comprehend the inflation problems of the nineties seventies, both in the UK where I was studying economics at the time, at Cambridge University, and here in the US inflation reached double digits, was a persistent rise. People would teaching the idea that

maybe we're supposed to beating inflation. We should index the tax system, we should should index wages, we should accommodate inflation. And really Paul Walker was the person with the political courage to do what Arthur Byrne said they could have done any time, but didn't have the will to do it, which was to defeat inflation. But the economic consequences of defeating inflation, because people's expectations were not aligned to a

lower inflation rate, were very significant. For a period of time, it was so important here folks, and this goes back John to the world stopped. I believe it was Thursday at three or four pm, and they announced M one, M two, M three. John explain out of Nut Vixel, and you're one of our great Vixellian economists, how we got to the monetary The monetorism went rather of of Professor Freeman in Chicago and the great David Laidler, the giant of Western Ontario. What did they what was their

ferment that led Volker to the courage in the late seventies. Well, it was really the idea that inflation, in the words of Mount Freetment, is always in everywhere and monetary phenomenon. Now. At the time that was probably more belief in what I call high Church monetarism, the idea that strictly control the money supply would in turn lead to strict control of inflation. And in that sense the view was was wrong.

But the interesting decision the banking did something very similar were this This set had been announcing the level of interest rates that it was controlling. It dropped that and

moved to this monetary targeting. Really because Falcon New and the Bank of England knew as well the interest rates were going to go to politically unacceptable level, so it had to be the market setting interest rates, not the Federal Reserve setting interest rates, or to be more tractors on the doorstep the set more people uh complaints from agricultural lobby and others, so that they switched to saying, if we control the money supply this pace, it will

bring inflation down. But if people don't adjust the expectations, then the market is going to set interest rates much higher. And that is effectively what happened for a short period

of time of a couple of years. Then the world moved back to more formal interest rate targeting, which the fact finally came out and in the year early and admitted that they were talking interest rates again when when we all knew that but for a while, which really a very smart political decision to allow the market to

determine the interest rate consequences of controlling inflation. Hey, John, what I find maybe most fascinating about the life of Paul Vulgar is that twenty years after leaving the Federal Reserve at the age of eighty one, President Obama taps him to come in take a look at the banks after the financial crisis, or you know, right at the end of the financial crisis, and the net result is something called the vocal Vocal rule. Tell us what the vocal rule is, what it does, and kind of what

its legacy has been. Well, as pro Voker described the Fatal rule and how it's finally implemented and currently implements quite differently. I actually went to listen to him right around the time of him talking about the vocal which is really very simple, which is, if you're a bank and you're taking deposit assurance and therefore the risks in a sense of subsidized by the taxpayer, who shouldn't be

out taking investment banking risk. Now we'd had a breakdown of that separation between commercial banking investment banking, or you know, in years leading up to that, and so in this mind it was a very very simple proposition. In the end, it was a hundred page regulation. So um, I don't think it was implemented in the way that Paul would necessarily have wanted it to be implemented. But in the US we don't follow the spirit of the law. We follow the letter of the low and the letter of

the law tends to be written very very long. John writing with us with Q Economics as we consider the life the heritage of Paul Poker debt at ninety two. Uh this morning, I should say this weekend as well, John Riding were in a new and modern age. You codified in your time at bear Stearns the idea of a central bank on the golf course, and that potting range kept being moved. How deep, how deep was the rough that Paul Walker was in explained to us just exactly how bad it was at the bank of England

and the FED in nine seventy nine. That was it was, It was very bad. In fact, it was on the verge of leading to you know, major change in in the political environment and the economic, tax and regulatory environment. UH. In nine miss Statue was elected to inflation of the UK goal closed much of them. Yeah, you know, the US was not not class about that. But you know, we had Lotald Reagan replacing Jimmy Coxon. Then we had this view of that that race need to be low.

We need to incentive is the private sector to take risk and not tax phantom gains away because inflation that those kind of rates creates massive phantom games. Let's say that the inflation rates ten percent, which about what it was when Paul Walker came into the FED, and let's say that nominal interest rates were twelve percent. You know, the tax system is going to attach us if you were really making twelve percent when the government's already taking

ten percent in terms of inflation. So capitalism was struggling to function. There was a tremendous misallocation of resources. UH. And that was something that Paul Valker need knew needed to be fixed and had the courage to fix it, John writing, thank you so much on short notice for joining us today. He's a lad Q Economics and just the thrill to have Mr Writing former Bank of England and said remember where this is just a great, great unity.

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