Wayne O'Leary

Volcker at Twilight

In the midst of the assorted craziness surrounding this year’s midterm elections, a milestone of sorts passed largely unnoticed. Former Federal Reserve Chairman Paul A. Volcker, one of the country’s financial wise men and a leading figure in economic policymaking for the past 40 years, added what could become the final installment to his professional legacy. Volcker, 91 and ailing, has produced (with the assistance of Bloomberg Markets editor Christine Harper) a memoir entitled Keeping at It: The Quest for Sound Money and Good Government.

Described by advance reviews as a combination policy screed and insider tell-all on the doings of Washington during his time on the scene, the book details Volcker’s interactions with political administrations from Nixon to Obama. Prior to its formal release on Oct. 30, the author consented to an interview with New York Times columnist Andrew Ross Sorkin that added context and shed further light on Volcker’s late-evolving views, which have undergone a surprising metamorphosis.

Though a Democrat, Volcker started out as a Wall Street economist and a devotee of the monetarist theories of conservative economic guru Milton Friedman — that is, a believer in the money supply as the be-all and end-all. In practice, being a monetarist means you address the problem of inflation by shrinking said money supply through high interest rates, inducing recession, unemployment, and bankruptcy to whatever extent necessary to achieve price stability.

As chairman of the Federal Reserve Board (1979-87), appointed by Jimmy Carter and reappointed for one term by Ronald Reagan, Volcker carried out the precepts of monetarism with a vengeance against the inflation induced by the oil crisis of the Carter years. His tight-money policies, cruel in the extreme, eventually “broke the back of inflation,” but as critic Robert Reich put it, they also broke the back of the economy, bringing on the rolling recessions of the early 1980s. This brought him into conflict with the expansionist supply-siders of the Reagan administration, who engineered his dismissal as Fed chairman in 1987.

Volcker was no hero to the left, however, where the consensus view remained that he had gone too far in extinguishing inflation. In the meantime, Volcker’s successor Alan Greenspan (1987-2006) went to the opposite extreme, acquiescing to the Reaganite view that Volcker had been insufficiently friendly to deregulation and putting the economy on a laissez-faire fast track to financial crisis. Then, 2008 happened.

Suddenly, after two decades of relative obscurity in private-sector banking, Volcker was back in vogue. As the crisis deepened, he endorsed Barack Obama for president, publicly criticized the nation’s banks for their role in wrecking the economy, called for more stringent regulation of the financial sector (including its use of derivatives), and proposed a break-up of the too-big-to-fail banks. He also assumed the role of economic advisor to the incoming president, initially heading his Economic Recovery Advisory Board.

For a time, it appeared Volcker would play a key role in the Democratic administration, but that never transpired due either to a generational divide with the new chief executive or perhaps Volcker’s more traditionally liberal approach to government regulation, which set him apart from the predominantly centrist Obama economic team. The president did feel Volcker out for Treasury secretary, but the post went instead to Obama’s contemporary, the notoriously banker-friendly Timothy Geithner.

In retrospect, the fortunes of the Democratic party and the country generally would have been far better served by a Volcker appointment to Treasury, his monetarist quirk notwithstanding. Ultimately, the former Fed chairman’s only direct influence on Obama economic policy was the Dodd-Frank banking law’s inclusion of the reform named for him, the so-called Volcker Rule.

An outgrowth of its namesake’s belief in a reestablished separation between commercial and investment banking on the order of the Depression-era Glass-Steagall Act (repealed in 1999), the Volcker Rule banned high-risk “proprietary trading,” speculative activity carried on by federally insured commercial banks with their depositors’ assets — or, as Louis D. Brandeis famously characterized it years ago, using “other people’s money” to make profits. Volcker’s reform also initially outlawed bank ownership of, and investment in, hedge funds and private equity funds, a restriction later dropped by congressional conferees.

Unfortunately, the Volcker Rule, the high-water mark for Obama-era financial reform, has, since its full implementation in 2014, been watered down with exemptions and exceptions by special-pleading bankers, a hostile GOP Congress, and an unsympathetic Federal Reserve Board chaired by a Trump-appointed conservative. The fate of his pet project has angered Volcker and contributed to a startling transformation in his attitude toward government and the prevailing system at large, which came bubbling to the surface in his recent Times interview.

Volcker blamed the gradual withering away of his signature reform on the negative impact of the lobbyists and think tanks now dominating the nation’s capital. As he pointedly expressed it in his book, “There is no force on earth that can stand up effectively, year after year, against the thousands of individuals and hundreds of millions of dollars in the Washington swamp aimed at influencing the legislative and electoral process.”

But the former Fed chairman went further, honing in on the crux of our political dysfunction, namely the corrupting influence of money. The central issue, he said, was that America was turning into a plutocracy, a country ruled by a wealthy class. “We’ve got an enormous number of enormously rich people,” he told interviewer Sorkin, “that have convinced themselves that they’re rich because they’re smart and constructive. And they don’t like government, and they don’t like to pay taxes.”

He was losing patience, Volcker added, with economists “telling us open markets are wonderful [and] everybody benefits from open markets.” They hadn’t worked for many manufacturing communities whose job bases had disappeared, he noted, and credited this with a large part of Donald Trump’s perverse appeal. Trump, flawed as he was, had accurately perceived the economic angst America’s elite had ignored.

Looking forward, Volcker expressed serious concerns about the next financial crisis, which manipulative bankers were likely already in the process of creating. The real future challenge for economic policymakers, he predicted, would not be monetary policy as in his day, but establishing “better, stronger supervisory powers” over the plutocracy’s moneymen.

Welcome to The Resistance, Mr. Volcker. Better late than never.

Wayne O’Leary is a writer in Orono, Maine, specializing in political economy. He holds a doctorate in American history and is the author of two prizewinning books.

From The Progressive Populist, December 1, 2018

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