Paul Volcker, a reassuring face

November 27, 1:33 PMEconomic Policy ExaminerJoseph Hight

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Paul Volcker

There’s something reassuring about having Paul Volcker on the Obama economic policy team.  He’s 81; he reeks of experience, and as far as I can tell, has been removed from the developments that led us to the current financial and economic crises.

On the day before Thanksgiving, the President elect asked Volcker to lead the Economic Recovery Advisory Board, a newly created position, on a newly created panel that will provide advice to Obama on how to get us out of the crisis.

Volcker will join Timothy Geithner – at Treasury, Lawrence Summers -at the National Economic Council, Ben Bernanke – a holdover as Chairman of the Federal Reserve Board, Christina Romer – as head of the Council of Economic Advisors, and Peter Orzag as head of the Office of Management and Budget.  They will all provide advice to Obama on how to attack the problems left us by the burst housing bubble and the resulting collapse in the value of mortgage backed securities and their derivatives.

This is an impressive economic team, and it remains to be seen if Volcker will be able to make his voice heard among such an array of talent.

Volker is by far the eldest of the group.  In 1975 at the age of 47, Volker became Chairman of the New York Federal Reserve Bank, the post Tim Geithner is leaving to become Obama’s Secretary of Treasury.  In 1979, Volcker, under Jimmy Carter, became chairman of the Board of Governors of the Federal Reserve System – the post now held by Ben Bernanke. Volcker served as Fed chairman until 1987.  His tenure there encompassed some very difficult economic times.  His job at that time was to wring inflation out of the U.S. economy. Consumer prices rose at a rate of 13.3 percent in 1979 and 12.4 percent for all of 1980.

While at the Federal Reserve, Volcker tightened up on credit.  Home mortgage rates of interest approached 20%; and in 1982, the rate of unemployment reached a post war high of 11%, roughly double today's rate. The unemployed, and workers fearing that they would be next to lose their jobs, and union members were marching on Congress, and demonstrating at the front doors of the U.S. Department of Labor.  I remember it vividly, because I was working on the second floor, just overlooking those front doors.

But Volcker tough medicine worked.  Inflation was wrung out of the U.S. economy, and that laid the ground work for the economic expansion that we enjoyed during the decade of the nineties.

Today, the problems are quite different of course.  For one thing, rather than a fear of inflation, there is a fear of falling prices, or deflation, which, paradoxically could also lead to high unemployment rates, as consumers pull back and wait for prices to fall even further.

But it is reassuring to have Volcker, who had been at the forefront of that earlier crisis, lending his voice and experience, as the new President Barack Obama tries to figure out the best way to deal with our current crisis.

See the video of Volcker with Charlie Rose back in March 2008, where he talks about the financial crisis that was unfolding, and expresses some doubt about the wisdom of some of the actions that were being taken.

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