Paul Volcker

Voclker, the anti-populist

This important week has been marked by the passing of Paul Volcker. Many commentators have already paid tribute to a remarkable man. Martin Wolf in the Financial Times referred to him as the ‘greatest man I have known’.

I have never met Volcker (though am privileged to share an excellent editor with him in John Mahaney at PublicAffairs who has edited ‘Keeping at it’) but I wanted to write about him because his legacy touches on the themes in ‘The Levelling’, and more importantly on the state of the world today.

In that context, Volcker stands for many of the things that are missing in our international political economy – a willingness to take unpopular though telling policy actions, the independence of central banks from markets and politicians, and the integrity of those in public life.

His accomplishments as a central banker, his role in helping survivors of the Holocaust recover their savings from the Swiss banks and his views on banking (i.e. the Volcker Rule) underline these qualities.

When he was appointed as Chair of the Federal Reserve, the central bank was nothing as powerful as it is today. Arthur Burns, the Chair from 1970 to 1978, was widely seen as being close to President Nixon, and had later been undermined by the Nixon White House. William Miller who followed Burns, had a short and inglorious career as a central banker (March 1978 to August 1979) and was promoted ‘out of the way’ to become Treasury Secretary. His legacy, a sharply weaker dollar and inflation barreling towards 15%, is beyond the imagination of many people today. Bluntly, high inflation became the policy problem of the day.

Volcker took the reins at the Fed with a clear view as to what needed to be done (‘This is going to be tough, but we are going to stick with it and the inflation rate is going to come down’). To the credit of President Carter who appointed Volcker, Carter also understood the consequences of what Volcker would do. During Volcker’s ‘job interview’ with Carter, Volcker thrice stressed the magnitude of the policy task at hand, to which Carter acquiesced.

By the mid 1980’s Volcker’s medicine was taking effect. Inflation was falling, but the personal costs of his role were also growing. Homebuilders regularly sent him blocks of wood to remind him of the burden that high rates were having on the housing market, and threats to his safety meant that Volcker needed a bodyguard.

Political resistance was also growing. In his book, Volcker mentions a meeting with President Reagan and his chief of staff, James Baker, where Baker reportedly insisted that Volcker not raise interest rates at a forthcoming Fed rate setting committee. Volcker’s response was to get up and leave the meeting.

Thus he cemented the independence of the Fed (Reagan later appointed several White House ‘friendly’ board members to the Fed to stymie Volcker), drove down inflation and in doing so triggered perhaps the most important macro trend of the past thirty years in the shape of the permanent, lower resetting of interest rates and inflation.

This enabled the economic boom in Reagan’s America and provided the structural basis for globalization. Globalization could not have happened and survived if the US economy, and by extension the rest of the world, had had to endure bouts of high inflation and sharp rises in interest rates. Many people today will know little about Volcker, but in a fundamental way, his actions have impacted their lives.

In the sense of the way in which we read our world today, Volcker could be described as an ‘anti-populist’. He was a humble technocrat, or expert, who confronted very tough decisions, with unpopular side-effects. There are at least two reasons as to why he should be studied.

The first is that the world is beset by the accumulation of near existential risks – indebtedness is the highest it has been since the second world war and the Napoleonic Wars before that and, the climate is warming at a rate never seen in the past two hundred years and many cities suffer paralyzing pollution. These and other risks badly need a Volcker type character to resolve them, or else they will be patched up in a crisis. Policy makers need courage, rather than new frameworks.

This is doubly true in a world where the ECB and the Fed are experimenting with new ways of encroaching into the political economy and by extension, of distorting markets. Quantitative easing and negative interest rates have not created organic economic growth. Instead they drive asset bubbles, build wealth inequality and give reckless politicians the cover to engage in poor policy (i.e. Trump’s trade war). Developed world monetary policy risks fatally compromising itself. Volcker would not approve, neither should we.