In 2005 Paul Volcker wrote an op-ed piece for the Washington Post. In the piece - entitled "An Economy on Thin Ice" - he warned that the apparently healthy U.S. economic recovery (which seemed to be in full swing at the time) was based on shaky grounds. Large current account deficits and rapidly increasing debt leverage were underpinning the U.S. economy's growth at the time, and Volcker warned that the day of reckoning would one day come.
At the time Volcker was dismissed as a tired old man fighting the last battle. He didn't seem to understand the new ways of the economy and of finance, it was argued.
Well, of course he was right. Three years after he wrote his piece for the Post the economy crumbled, and the worst financial crisis since the Great Depression ensued.
The reason I remember that piece so well was that I had printed it out and hung it on a board in my office for several years.
In my opinion, Paul Volcker was one of the most courageous public officials to serve in office. Appointed by Jimmy Carter in the late 1970's as Fed Chairman, Volcker inherited a financial system swamped with inflationary pressures. His predecessors had been totally ineffective - one chairman even joked that his friends thought that "Federal Reserve" was some sort of whiskey.
Volcker knew he had to do something, and in the infamous Saturday night massacre he did. After spending the week in Europe being lectured by other central bankers, Volcker flew home early from the meetings. On Saturday, October 3, 1979, he announced that the Fed would no longer target interest rates as a policy means, but instead would try to control money supply as a way to cut inflation.
Interest rates soared, and the economy buckled. By 1981, the bank prime rate was over 21%, and mortgage rates touched 19%. Still Volcker persisted, despite widespread protests (one favorite was to send Volcker a piece of wood to let him know that he was killing housing).
The medicine worked. Inflation was stopped, and the stage was set for one of the strongest periods of economic growth in U.S. history.
The reason I give you all of this background is because Volcker has always been willing to state what he believes is right, regardless of the political consequences. And at age 82, he doesn't really have any reason to hold back.
So when he gave these remarks a few weeks ago (I only found them on Twitter today) I thought they were worth a careful read.
One of the nice parts of Volcker's talk is the fact that ends with a note of optimism. He's not just a gloom-and-doom guy. Instead, he is arguing that, yes, we have problems, but properly addressed they might still be solved:
I referred at the start of these remarks to my sense five years ago of intractable problems, resisting solutions. Little has happened to allay my concerns. But, of course, it is not true that our economic problems are intractable beyond our ability to react, to make the necessary adjustments to more fully realize the enormous potential for improving our well-being. Permit me a note of optimism.
A few days ago, I spent a little time in Ireland. It’s a small country, with few resources and, to put it mildly, a troubled history. In the last twenty years, it took a great leap forward, escaping from its economic lethargy and its internal conflicts. Responding to the potential of free and open markets and the stable European currency, standards of living have bounded higher, close to the general European level. Instead of emigration, there has been an influx of workers from abroad.
But now Ireland has been caught up in its own speculative excesses and financial deficits, culminating in a sharp economic decline. There is a lot of grumbling, about banks in particular. But I came away with another impression. The people I spoke to had an understanding that the boom had gotten out of hand. There seems to me a determination to do something about the situation, reflected not just in the words of the political leaders but in support for action among the public. And there is a sense of what is at stake, that the gains they made in recent years have been placed in jeopardy. The urgent need to get back on a sustainable budgetary and economic track is well understood.
I hope my quick impressions of Irish attitudes and policies will be borne out and that that small country will not be caught up by a European crisis beyond its control. In the United States, we don’t seem to me to share the same sense of urgency. We view ourselves as a huge and relatively self-sufficient country, in control of our own destiny. We have time to sort out our priorities, to decide what to do, and to do it. There are elements of truth in those propositions, but the time we have is growing short.
‘The Time We Have Is Growing Short’ | The New York Review of Books
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