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Paul Volcker, Last of the Great Central Bankers

Posted by ProjectC 
'[Paul Volcker] would take a stand and withstand the wrath. Our world today is desperately lacking such leadership. Sounding hopelessly archaic, I foremost blame the current disheartening state of the world on decades of increasingly unsound finance, with inescapable financial and economic fragilities along with social and geopolitical strains (having taken root soon after Volcker departed the Fed). A world devoid of a sound money and Credit anchor is inevitably a world unhinged.

..

The irony of it all. A more youthful Paul Volcker would be a pariah – a wretched antagonist naysayer in today’s world of market-dominated loose finance and central bank kowtowing to the almighty markets. Yet those that would deride a young Volcker these days absolutely cherish his legacy. Because the Volcker Fed slayed the beastly inflation dragon, policymakers now enjoy the prerogative of doing whatever it takes to sustain bull markets and economic expansions.'



Last of the Great Central Bankers


By Doug Noland
December 21, 2019
Source

Oregon’s economy was at the time ravaged by our nation’s high inflation and Paul Volcker’s battle to rein it in. The state’s unemployment rate was over 10% when I graduated from the University of Oregon in 1984. I don’t recall having animus toward the Federal Reserve but was instead frustrated with Washington’s huge deficits.

Paul Volcker was a courageous public servant. From the New York Times: “He prevailed by delivering shock therapy, driving the economy into a deep recession to persuade Americans to abandon their entrenched expectation that prices would keep rising rapidly.”

Much has been written over the past week honoring an extraordinary life. My thoughts returned to heart-felt comments uttered a couple months back by Chairman Powell:

“I’ve known Paul Volcker since I was an Assistant Secretary in the Treasury in 1992 or 1991. Of course, at that time, he had just relatively recently left the Fed - and I was frightened of even meeting him. I was just so intimidated by this global figure. And he couldn’t have been nicer and more interested in helping me and supporting me and we kind of kept up. He was really a great person to know. I read numerous accounts of his life. This book, if you haven’t read it, really sums it up really well. I don’t think there has been a greater public servant in our broad area in our lifetimes. He really just did exactly what he thought was the right thing – all the time. And he lets the chips fall where they may. He was famously booed at a Washington Bullets basketball game when he had rates very high… He’s a great man. I’m still in touch with him. I actually thought that I should buy 500 copies of this book and just hand them out at the Fed. I didn’t do that. It’s a book I strongly recommend, and we can all hope to live up to some part of who he is.”

And from Ben Bernanke (quote from NYT): “He came to represent independence. He personified the idea of doing something politically unpopular but economically necessary.”

“Paul Volcker was the most effective chairman in the history of the Federal Reserve.” Alan Greenspan

The Financial Times’ Martin Wolf began Paul Volcker's tribute article with the opening lines from his review of Mr. Volcker’s memoir, “Keeping At It: The Quest for Sound Money and Good Government.” “Paul Volcker is the greatest man I have known. He is endowed to the highest degree with what the Romans called virtus (virtue): moral courage, integrity, sagacity, prudence and devotion to the service of country.”

Somehow Wolf allowed his memorial to descend (pathetically) into inflationist propaganda: “When demand is weak and inflation low, however, central banks must ease monetary policy. But expansionary policy is technically difficult once short-term interest rates reach zero. Central banks have to consider various unconventional alternatives: expansion of balance sheets via ‘quantitative easing’; negative interest rates; and what the monetarist Milton Friedman called ‘helicopter drops’ of money to the public through direct payments or permanent monetary financing of fiscal deficits.”

Spare us (especially when honoring a noble sound money proponent).

The passing of Paul Volcker marks the end of “the greatest generation” of monetary policy stewards. To be sure, the periods from McChesney Martin to Volcker were far from perfect. But they were also a far cry from reckless.

It’s now a profoundly changed era. Chairman Volcker was resolutely determined to pop the consumer price inflation Bubble. He was intensely criticized and, of course, faced political backlash. Yet there was a strong constituency that recognized inflation’s deleterious effects. No one would dare contemplate popping today’s inflationary asset price Bubble. An incredibly powerful constituency is resolute in perpetuating one of history’s most threatening inflations.

I believe Chairman Powell had hoped “to live up to some part of” the Volcker legacy. Powell’s courage to stand up to the markets was rather decisively quashed in a few short weeks. The lesson here – that would be vehemently scorned if only the world wasn’t hopelessly oblivious – is that Bubbles not repressed grow progressively powerful. Dr. Bernanke may admire Volcker’s independence and determination to pursue a politically unpopular policy course. Just imagine the fortitude necessary to drive interest rates to 20%, as equities and bonds tanked and the economy gasped. It’s infinitely easier to slash rates and expand the Fed’s balance sheet (creating electronic “money” and captivating bull markets in the process).

Volcker is a true policy hero whose virtues and accomplishments have withstood the test of time. He was willing to inflict acute short-term pain for the prospect of long-term gains. Volcker accepted being a villain with no expectation of vindication. He steadfastly followed his moral and ethical guiding light. In a financial world colored with seductive variations of gray, Paul Volcker’s “sound money” framework readily distinguished right from wrong.

He would take a stand and withstand the wrath. Our world today is desperately lacking such leadership. Sounding hopelessly archaic, I foremost blame the current disheartening state of the world on decades of increasingly unsound finance, with inescapable financial and economic fragilities along with social and geopolitical strains (having taken root soon after Volcker departed the Fed). A world devoid of a sound money and Credit anchor is inevitably a world unhinged.

I ponder Paul Volcker’s career path had he been born in 1957 instead of thirty years earlier. It’s difficult picturing him qualifying for a position as a top Fed official in our era. He would call BS on QE and zero/negative rates. It would be a decisive “hell no!” to propping up highly speculative financial markets. Volcker would be repulsed by the notion of the Fed accommodating Trillion dollar federal deficits in a non-crisis environment.

It’s more than a challenge envisaging how Volcker’s exemplary personal attributes would be showcased in this day and age. Some unfairly associated his contentious views over the past decade with senility. Such notions from a more junior Volcker would have been chalked up to the rantings of a nutball. He was a disciple of sound money principles from a bygone era. Operating in today’s world of rank inflationism, this great man would have been relegated to the unexemplary.

Mr. Volcker’s passing is a sad reminder of how severely the world has lapsed. It’s similar for individuals, corporations, governments and the markets: add a significant amount of debt and you lose flexibility – you sacrifice freedom, independence and more. Well-tested traditional values and principles are too easily abandoned. The corrosion starts subtly only to end outrageously. Pushing short-term rates these days to 20%? Ten-year Treasury yields above 15%? Inconceivable. But almost as farfetched today would be any imposition of tight monetary conditions. At this point, 3% Fed funds and 4% ten-year yields would surely spark financial crisis.

The irony of it all. A more youthful Paul Volcker would be a pariah – a wretched antagonist naysayer in today’s world of market-dominated loose finance and central bank kowtowing to the almighty markets. Yet those that would deride a young Volcker these days absolutely cherish his legacy. Because the Volcker Fed slayed the beastly inflation dragon, policymakers now enjoy the prerogative of doing whatever it takes to sustain bull markets and economic expansions.

With inflation eradicated, the sky’s the limit as to the optimal size of central bank balance sheets. No amount of deficit spending (bond issuance) risks a spike in market yields, not with the annihilation of inflation risk. Asset inflation is to be actively promoted rather than feared. Meager inflation ensures central bankers can aggressively reflate faltering market Bubbles without concern for unleashing inflationary pressures. Volcker’s accomplishment laid the groundwork for the abdication of business and market cycles: the wonder of Capitalism free from the hinderance of corrections and adjustment. It’s a narrative befitting of Volcker’s inflationist successors, while dishonoring the legacy of the Last of the Great Central Bankers.

Excerpt from a recent Paul Volcker writing published in the December 11th, 2019, Financial Times:

“By the late summer of 2018, it was already clear that the US and the world order it had helped establish during my lifetime were facing deep-seated political, economic, and cultural challenges. Nonetheless, I drew reassurance from my mother’s reminder that the US had endured a brutal civil war, two world wars, a great depression, and still emerged as the leader of the ‘free world’, a model for democracy, open markets, free trade, and economic growth. That was, for me, a source of both pride and hope.

Today, threats facing that model have grown more ominous, and our ability to withstand them feels less certain. Increasingly, by design or not, there appears to be a movement to undermine Americans’ faith in our government and its policies and institutions. We’ve moved well beyond former president Ronald Reagan’s credo that ‘government is the problem’, with its aim of reversing decades of federal expansion.

Today we see something very different and far more sinister. Nihilistic forces are dismantling policies to protect our air, water, and climate. And they seek to discredit the pillars of our democracy: voting rights and fair elections, the rule of law, the free press, the separation of powers, the belief in science, and the concept of truth itself.

Without them, the American example that my mother so cherished will revert to the kind of tyranny that once seemed to be on its way to extinction — though, sadly, it remains ensconced in some less fortunate parts of the world…

Monetary policy is important, but it cannot by itself sustain global leadership. We need open markets and strong allies to support economic growth and the prospects for peace. Those constructive American policies have been a large part of my life. Instead, confidence in the US is under siege.

Seventy-five years ago, Americans rose to the challenge of vanquishing tyranny overseas. We joined with our allies, keenly recognising the need to defend and sustain our hard-won democratic freedoms. Today’s generation faces a different, but equally existential, test. How we respond will determine the future of our own democracy and, ultimately, of the planet itself.”


Statesman to the end.



Context

(Banking Reform - English/Dutch) '..a truly stable financial and monetary system for the twenty-first century..'