Volcker's Tough Approach As Fed Chief Upset Many
Thursday, November 27, 2008
Paul A. Volcker was reviled before he was revered.
President-elect Obama named the 81-year-old Volcker yesterday to head a new economic advisory panel, citing "his sound and independent judgment." But nearly three decades ago -- when Obama was still a college student -- the towering 6-foot-7-inch Volcker was one of the most disliked public figures in the United States.
As Federal Reserve chairman, he took an uncompromising stance against inflation, jacking up interest rates as high as 20.5 percent. Unemployment soared to 11 percent in the most painful recession since the Great Depression. Volcker had been appointed by President Jimmy Carter in 1979, but his tough medicine likely contributed to the Democrat's failure to win reelection in 1980.
According to Joseph Treaster's 2004 biography, "Paul Volcker: The Making of a Financial Legend," angry workers who had lost their jobs flooded Volcker's office with mementos of their plight -- two-by-fours from carpenters unable to build houses; bags filled with ignition keys from car dealers stuck with unsold cars. One leading Democrat, Rep. Henry Gonzalez of Texas, called for Volcker's impeachment. Another, Rep. Frank Annunzio of Illinois, sputtered at the cigar-smoking Volcker during a hearing: "Your course of action is wrong. It must be wrong. There isn't anyone who says you are right."
Republicans were no happier during Volcker's eight-year chairmanship. While President Ronald Reagan remained silent as Volcker's policies sent his approval ratings tumbling, White House aides were eager to remove the Fed chairman. He finally stepped down in 1987, to be replaced by Alan Greenspan.
While Volcker's tenure has to some extent been overshadowed by Greenspan's 18-year run, many experts credit him with finally whipping inflation and setting the stage for the economic boom that followed. Inflation has never been a serious threat to the U.S. economy since the Volcker years.
"Without Paul Volcker's toughness and guts, we may never have broken the grip of rising inflation and declining productivity that plagued the United States during the 1970s," Arthur Levitt Jr., former chairman of the Securities and Exchange Commission, wrote in the foreword of Treaster's book. Levitt noted that at the time he was mocked when he tried to defend Volcker's actions.
Indeed, Volcker's star has risen again as Greenspan's reputation has fallen during the recent economic downturn. Unlike Greenspan, an unabashed promoter of the free market, Volcker was skeptical that market forces would check lax regulation. As chairman, he refused to loosen the boundaries between investment and commercial banks, as later occurred under Greenspan.
"Simply stated, the bright new financial system, for all its talented participants, for all its rich rewards, has failed the test of the marketplace," Volcker said during a scathing attack on Greenspan's approach earlier this year. "What has plainly been at risk is a disorderly unraveling of the mutual trust among respected market participants upon which any strong and efficient financial system must rest."
Volcker, who received economics degrees from Princeton and Harvard universities, as a younger man also played a critical role in President Nixon's dramatic decision in 1971 to eliminate fixed exchange rates, letting the dollar float against other currencies. Volcker was the architect of the move as a Treasury Department undersecretary.
Since leaving the Fed, Volcker has worked at an international advisory firm and headed a number of investigations into such issues as corruption in the United Nations' oil-for-food program with Iraq, the Enron-related accounting scandals and whether certain Swiss bank accounts belonged to Holocaust victims.
Volcker has never been associated with partisan politics. Campaign records show that over the years he has contributed modest sums to a mix of Democrats and Republicans, including Sen. Pete V. Domenici (R-N.M.), then-New York Mayor Rudolph W. Giuliani (R), Sen. Charles E. Schumer (D-N.Y.) and then-Sen. Bill Bradley (D-N.J.). The most he has ever contributed to a single candidate was $2,300 to Obama's primary campaign in February.
Volcker's support for Obama was secured by Austan Goolsbee, an Obama campaign aide who was named the staff director of the panel that Volcker will head, according to a transition team official. Over the course of the campaign, the official said, Volcker became an important voice on economic issues, such as reviewing a speech Obama gave at Cooper Union college that called for revamping regulations for financial firms. Obama would speak to Volcker two or three times a week.
"The president-elect just loves these conversations. He finds them helpful to framing his thinking," the transition aide said, speaking on the condition of anonymity because he was not authorized to speak publicly. The advisory panel was created after the campaign was over in order to ensure Obama has access to a wide range of opinions on economic matters, he added.