Volcker issues dire warning on slump

[girl gone mad]

Volcker issues dire warning on slump

Paul Volcker, the former chairman of the US Federal Reserve, has warned that the economic slump has begun to metastasise after a shocking collapse in output over the past two months, threatening to overwhelm the incoming Obama administration as it struggles to restore confidence.


By Ambrose Evans-Pritchard
Last Updated: 10:39PM GMT 17 Nov 2008

"What this crisis reveals is a broken financial system like no other in my lifetime," he told a conference at Lombard Street Research in London.

"Normal monetary policy is not able to get money flowing. The trouble is that, even with all this protection, the market is not moving again. The only other time we have seen the US economy drop as suddenly as this was when the Carter administration imposed credit controls, which was artificial."

His comments come as the blizzard of dire data in the US continues to crush spirits. The Empire State index of manufacturing dropped to minus 24.6 in October, the lowest ever recorded. Paul Ashworth, US economist at Capital Economics, said business spending was now going into "meltdown", compounding the collapse in consumer spending that is already under way.

Mr Volcker, an adviser to President-Elect Barack Obama and a short-list candidate for Treasury Secretary, warned that it is already too late to avoid a severe downturn even if the credit markets stabilise over coming months. "I don't think anybody thinks we're going to get through this recession in a hurry," he said.

He advised Mr Obama to tread a fine line, embarking on bold action with a "compelling economic logic" rather than scattering fiscal stimulus or resorting to a wholesale bail-out of Detroit. "He can't just throw money at the auto industry."

http://www.telegraph.co.uk/finance/economics/3474683/Volcker-issues-dire-warning-on-slump.html

[On the Road]

1. If Volcker Wants Treasury

he would be an excellent choice. Unimpeachable intergrity, long experience, and bipartisan support. Fiscally conservative as an antidote to Bernanke's expansionist tendencies.

[girl gone mad]

2. I would be thrilled if Volcker was appointed.

He is one of the few who spoke out against Greenspan's bad practices over the years. He knows his stuff and is not afraid to do the right thing.

[On the Road]

3. I've Been Doing the "Kremlin-Watch" Thing Recently

noticing how prominently Volcker is situated in groups and how close he's standing to Obama. He seems to have been showcased. Plus he's been an Obama supporter for awhile now, which helps.

[barb162]

18. The man has gravitas, I just don't know if he has solutions.

At the same time, I don't know if there are any solutions right now. There's so much toxicity in the economy right now and it's been building for decades.

[Jim__]

5. Volcker would be an excellent consultant for the Obama administration.

At 81, I doubt he has the energy that the new Treasury Secretary is going to require. This country is just entering into an economic disaster. The Treasury Secretary will have to work extremely long hours.

[On the Road]

6. That's My Concern, Too

I was surprised he was still so active. I'm sure there are younger people, but not many with his stature in both parties.

[HamdenRice]

7. delete, wrong place

[Hawkowl]

4. Volcker for Treasury Sec!

He would be a terrific choice. He can really make the hard decisions.

[HamdenRice]

8. Volcker was the worst Fed Chairman in history

When I see people shilling for Volcker, I realize that age really does confer certain benefits of wisdom.

If you were alive and adult during the late 70s, early 80s, then you lived through the Volcker era, when he raised interest rates to astronomical levels (1) to defeat Democrat Jimmy Carter and ensure the election of Ronald Reagan, and (2) the "wring out" all inflation from the economy, which actually benefited working class debtors, students loan debtors, mortgage holders, etc., to usher in the era of Wall Street ascendancy.

Any one who thinks Volcker would be a good choice is a blathering idiot bereft of any knowledge of economic history.

[Jim__]

9. Volcker did a good job in an impossible situation.

Jimmy Carter appointed Volcker to be chairman of the fed in 1979 - i.e. with an election approaching. Volcker was then with the New York Fed and was a strong, consistent advocate of higher interest rates. Carter knew very well what Volcker was going to do. He was damn well going to raise interest rates. We had runaway inflation. I've always respected Carter for putting the country ahead of politics and I consider his appointment of Volcker to have been a part of that.

And, after Reagan was elected he squealed like a stuck pig over Volker's tight money policies, blaming the recession on Volcker and swearing if he had the power, he would force Volcker to change his policies.

Volcker may have been more lucky than skilled. But there is no denying the results of his policies. After Volcker wrung inflation out of the economy, I refinanced my house twice, dropping my mortgage payment from $750 to $400. Volcker's policies worked out pretty damn well for this working class debtor.

[HamdenRice]

10. The suffering of millions was not worth it; he was a class warrior for plutocrats

and there was no need to destroy the economy for over a year to bring inflation down.

It may have benefited you personally, but there is little question among economists that he was one of the worst, most class biased Fed chairmen ever.

[Celebration]

11. he did the right thing at the right time

But he should have let up sooner.

We do still have the lesson of the Weimar Republic to learn. The Europeans were closer to that--thus are generally tighter with monetary policy than we are.

[Hannah Bell]

22. he destroyed my home town & it never recovered.

it was not "the right thing". it was destroying the poor & middle to feed the top.

[On the Road]

12. Volcker DID Ring Inflation Out of the Economy

by letting interest rates rise to their market. After which he stimulated the economy during the 80s resulting in high growth with low inflation. The mindset of double-digit inflation was so strong in 1980 that it's amazing it retreated so quickly.

[HamdenRice]

13. Spoken like a true Republican, monetarist, U. Chicago Friedmanite

No wonder so many lefties get seduced by the right wing Ron Paul anti-Fed goldbugs. Complete lack of economic education, I suspect.

As a institution revamped during the New Deal, the Fed had two missions: (1) maintaining full employment and (2) maintaining a stable dollar value. According to New Deal directives, the Fed was always supposed to prioritize (1) full employment. Whenever the Fed throws millions out of work for the chimera of taming inflation, it's because the Friedmanite, Republican, U. Chicago, monetarists have gotten control -- obviously something you are in favor of.

Volcker's job, like the job of every Fed chairman, was supposed to be to maintain full employment -- if necessary, at the expense of the dollar.

The "inflation" of the 60s provided for wage growth that kept pace with or exceeded prices -- the so called "wage price spiral." That is what Volcker and Reagan wanted to kill. No wonder Reagan, like Thatcher, saw his first order of business to be killing a union (Padco).

Ever notice that whenever we hear stats about how wages have not grown since ... that the "since" refers to the alleged bad days of inflation in the late 60s/early 70s?

Now that you guys have gotten you wish, there is a price spiral without a wage spiral.

It's ironic that we have the first Keynesian Fed chairman since the 60s (Bernanke, an apolitical academic who spent most of his life studying the great depression and how to avoid it) and DUers, led astray by Ron Paul nutjobs and economic illiterates are excoriating him while praising Volcker! You have no fucking clue how sad and pathetic this is, from the perspective of economic literacy and economic histoy.

Heck of a job, gold bugs, Friedmanites, Republicans, Volckerists, and ribofunky!

[On the Road]

16. You Need to Read My Posts More Carefully, HamdenRice,

We've agreed on some other issues in the past. I am neither a Republican, monetarist, or Friedmanite. Nor am I an economist, although I did study macroeconomics at Maryland in the mid-80s from Al Teplin, who at the time worked at the Fed under Volcker's chairmanship.

There are a lot of people on DU who mistake right-wing populism for progressive economics, and need to be educated about where those ideas come from. I am not one of them.

As you point out, Roosevelt changed the mission of the Fed in the 30s. As you imply, your two missions were not the original mandate of the Fed. More importantly, no one in a position of leadership today would propose them as the only two missions of the Fed -- success is considered a matter of maintaining consisting economic growth while keeping inflation low enough to prevent a 70s-type inflationary spiral.

Volcker in fact did address both of your missions, just not at the same time. Who knows if a soft landing was possible, but I can't think of anyone at the time who thought so. His two predecessors Burns and Miller were ineffective at either one. Volcker was widely hated at the time, but he did in fact do something that was thought to be impossible by controlling inflation and reigniting growth in the space of a few years.

What you may be missing is that while Volcker constantly talked anti-inflation, after the brief early 80s recession he pursued very stimulative policies, actually misrepresenting what he was doing in order not to spook the markets. He publicly keyed in on modest targets for money supply growth and privately pumped more money into the economy than he was letting on. The fact that he showed that kind of balance is why I have some respect for him.

I also respect Bernanke, and agree that more stimulative policies are historically more progressive. But it is always a balancing act, and too much stimulation results in economic grief. One reason for the bubbles of the last ten years are the huge double-digit increases in money supply that began under Greenspan along with the the fiscal stimulus of the Bush tax cuts.

The boom times were the occasion when the Fed should have taken away the punchbowl, but instead more and more punch was brought out. The inflation you deplore is one byproduct.

The last decade was the time for restraint. Now is the time for more stimulus, although when things get out of hand, the stimulus is less effective and more expensive. I think Volcker and Bernanke would actually balance each other's tendencies very well. They are both professionals.

And BTW, are you calling our president-elect a right-wing nut job for having Volcker as an economic advisor?

[HamdenRice]

17. Sorry for over-reacting

There is just so much economic no-nothingism floating around that I sometimes am on hair trigger.

As for Obama, I think he has surrounded himself by a variety of voices, some from the Chicago school, some Keynesians, but I don't think that means he endorses them all equally.

I don't mean to say Volcker is stupid or has no information to offer on anything; only that his policy preferences put into practice were and would be utter disaster for working and middle class families, and completely unnecessary.

[barb162]

19. U of C economists scare me. Free traders, every one of them

as far as I know. I think we need some tariffs around here to protect some struggling industries. We can't even make a fucking towel in this country any more. Yep, tariffs will raise prices but at least Americans would be employed.

[Hawkowl]

23. Not so bad

I mean about prices increasing. IMO we are in a period of deflation, so price increases are a non issue. Some targeted tariffs to protect and stimulate local industry and wages could be a very good idea. It would also provide some much needed govt. revenue. Most people forget that the federal government was primarily funded by tariffs before the constitution was amended to allow an income tax.

[On the Road]

20. Thanks for the Comment

I just have a different take on Volcker's tenure at the Fed from you and a lot of people here.

As you know, Volcker went into the job talking monetarism and changed the way the Fed managed the economy from targeting interest rates to targeting the growth of the money supply, and let interest rates float.

But what he actually did was different. Friedman's idea was that the Fed should allow the money supply to grow at a small, constant rate and ignore any attempts by the Fed to stimulate or manage the economy.

Volcker's first goal was to get double-digit inflation under control. This incontestably was a major (or the major) cause of the early 80s recession. But once recession was under control, he pursued a very stimulative monetary policy, which helped lead to the growth of the 80s and 90s.

Who knows what would have happened under a different chairman, but no one at the time thought it was possible to do both those things within a few years.

The recession was certainly bad for average people, but so was inflation. I would not want a traditional hard-money, no inflation banker in charge of things now, but IMO he showed that's not who he was. In retrospect, he successfully pursued both of the goals that you find important.

Wages stagnated under Reagan, and there were a lot of other economic missteps, but those really weren't the Fed's job.

[Jim__]

14. Another economic illiterate with good things to say about Volcker -

uh, I didn't mean illiterate, I meant nobel laureate:

The Making of a Maestro: Greenspan is, without question, a very smart man. He has also been very lucky.

He had the good fortune to follow an illustrious predecessor. Paul Volcker assumed office at a time of double-digit inflation. During Volcker's eight years as Fed chairman, he tamed inflation and steered the world through a major financial crisis, then oversaw a powerful economic recovery. On becoming chairman in August 1987, Greenspan inherited both a healthy economy and an office whose prestige had never been higher.

Paul Krugman

Maybe you could call this blathering idiot bereft of any knowledge of economic history and give him the benefit of all your deep insight.

[sendero]

21. You are so totally clueless..

.. on every post pertaining to economics I don't know why you bother.

Volcker HAD to raise rates to quell inflation. He did what had to be done, whereas Greenspan didn't and the current debacle is largely his fault (pumping money into a bubble economy) because he didn't.

Volcker would be the absolute best choice, although as others have mentioned, there is no miracle event or person that can fix this mess now, it's just going to be a long slow slog out. But, the wrong person could definitely make it a whole lot worse, something Volcker at least won't do.

[clarence swinney]

24. volcker tight money cost 5 million jobs

LOST IN 1981 AND 1982

UNEMPLOYMENT WENT TO 10.8%.

OVER TIGHTENED.

[Odin2005]

25. I'm no economist, but this is what I have heard:

Basically what I have read is that the US government tried to have both guns (Vietnam) and butter (the Great Society) and that triggered inflationary pressures that forced the end of the Gold Standard and a massive currency devaluation followed, triggering stagflation. Then Volcker jacked up the interests rates to crush the hyperinflationary pressures and essentually hit the "reset" button on the US economy.

Then again, I wasn't alive then, so I don't have the luxury of having experienced that time period first hand. :shrug:

And I though I heard Volcker referred to as a "Neo-Keyensian"?

[JohnWxy]

15. Oh mr. Volcker, a better comparison is 1929 - similar too in that lack of market controls

lead to the same sort of disaster. This time it was enormous deficits to pay for the Iraq Oil adventure, along with interest rates too low too long to pump up the housing market (so something in the economy would look good) and finally topped off with the http://www.geocities.com/jwalkerxy/CFMA_Phil_Gramm.htm">Commodities Futures Modernization Act 2000 which lead to unregulated trading of formerly illegal contracts called Credit Default Swaps (sponsored by none other than http://www.geocities.com/jwalkerxy/phil_Gramm_Deregulator.htm">Phil Gramm "America has become a nation of complainers.").

In eight years we went from prosperity to immanent depression and very likely the disappearance of the domestic automobile industry.

Thank you Republicans and Phil Gramm in particular - the American Dream Going Down.