Volcker Got Wood
I had the pleasure of hearing Paul Volcker at lunch yesterday, who spoke for nearly two hours on a variety of subjects ranging from central bank policy, government inefficiencies, international monetary affairs and market confidence. The Former Chairman of the Federal Reserve still has one great advantage over all of his successors – a simple trait that is apparently lost in route to today’s PhD standard – common sense. The comment below perhaps illustrates this perspective best.
“My confidence in economists, in general, is not high. What surprised me about Greenspan is the enormous faith he placed in mathematical models. We have 250 PHD’s on the Federal Reserve Board. We’d probably get along fine with 50. If we had another 50, perhaps we’d find the right model. Greenspan thought he knew the world much better reading from a text book.”
These models create an expectation that the Fed can achieve more than it is capable of achieving. The question is, what can the Fed actually do. Chairman Volcker rightfully insists that the basic responsibility of all central banks is price stability, which is the foundation for other desirable goals. But a dual mandate may prevent the Fed from restraining the economy as much as it should in the face of increasing inflation and high unemployment. The political process makes this even more challenging. Bottom Line: When you keep interest rates very low for very long, you are going to feed the danger of creating bubbles.
Well said Chairman. Perhaps today’s central banksters should take their heads out of the text books and take some advice from the man who steered the US economy out of high inflation and slow economic growth. Sure, political pressure may make it more challenging to “take our medicine” this time, but some would say that Volcker experienced more political attacks and public protests than any other Fed Chairman during his tenure. High interest rates almost killed the construction and agricultural industries at the time. Farmers blockaded the main office of the Board of Governors with tractors. Contractors and carpenters, who complained their wood was not needed since no one was buying houses, actually mailed 2×4’s to Volcker’s office!
Times have changed. The current “pedal to the metal” Fed party – the driver of this subpar economic recovery and relentless rise in risk assets – is certain to come with a nasty hangover. Where is this leadership today?