With Trump poised to announce his pick for Fed Chair on Thursday, former Fed boss Paul Volcker quietly announced the forthcoming publication of his memoirs. Hopefully we will be spared a shamelessly self-serving title like Bernanke’s The Courage to Act. But in contrast to the fanfare surrounding post-retirement books by Alan Greenspan and Bernanke, Volcker’s offering likely won’t resonate with the financial press. It’s been 30 years since he served as Chair (1979 to 1987), and many of the principals in his story are dead or elderly. It all sounds like ancient history, especially to the under-40 quants populating Wall Street. In fact the 90 year old Volcker is mostly unknown both to the public today, though at 6’7’’ he literally and figuratively once cast a long shadow across the central bank.
But faint vestiges of his legacy survive, even in this sordid era of “extraordinary” monetary policy. David Stockman largely praises Volcker in The Great Deformation, reminding us that the former Chair “did not...dream of levitating the economy through the “wealth effect’ or by coddling Wall Street speculators.” Stockman also praises his willingness to steer short-term interest rates well above long-term bond yields, thus throttling the carry trade that is the target of Stockman’s unrelenting ire today. And unlike the madcap QE excesses of Bernanke and Janet Yellen, Volcker was not afraid to attack monetary inflation head-on, through the Fed’s balance sheet:
Volcker accomplished this true anti-inflation objective with alacrity. By curtailing the Fed’s balance sheet growth rate to less than 5 percent by 1982, Volcker convinced the markets that the Fed would not continue to passively validate inflation, as Burns and Miller had done, and that speculating on rising prices was no longer a one-way bet. Volcker thus cracked the inflation spiral through a display of central bank resolve, not through a single-variable focus on a rubbery monetary statistic called M1.
Murray Rothbard, needless to say, held all Fed Chairs and Governors in low regard-- bemoaning what he considered their “hagiographic treatment” by the press. Paul Volcker did not escape his withering pen:
When it looked for a while that the great Paul Volcker might not be reappointed as Fed chairman, the financial press went into a paroxysm of agony: no, no, without the mighty Volcker at the helm, the dollar, the economy, nay even the world, would fall apart. And yet, when Volcker finally left the scene years later, the nation, the economy, and the world, somehow did not fall apart; in fact, ever since, none of those who once danced around Volcker for every nugget of wit and wisdom, seem to care any longer that Paul Volcker is still alive.
Yet by current standards there is much to admire in Volcker’s tenure at the Fed.
First, he was (and likely will remain) the last Chairman even remotely worthy of the title “Fed hawk.” As Stockman makes clear, Volcker understood the argument for monetary tightening-- an argument completely lost to political concerns today. Second, he demonstrated (for awhile) actual political independence during both the Carter and Reagan administrations and was willing to abide a short-term recession. Finally, he understood the critical role interest rates and saving played in the lives of ordinary people depending on thrift rather than investing savvy.
Paul Volcker is no Austrian. But in our neo-Keynesian world of unbridled monetary stimulus, and compared to his successors, Paul Volcker looks pretty good.
