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The Obama administration’s best economic hope remains Paul Volcker.
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Volcker’s campaign has a certain sharp logic. While it is too much to assert that both the New York Times and the New Yorker are read by the same 1.4 million people, it can be argued that it likely has been a far smaller group of readers who parsed through both lengthy pieces plus Volcker’s own warnings in the New York Review of Books. And while it is likely that very few people outside of midtown Manhattan read any of them, especially within Washington’s chattering community, those currently in the saddle both in the Congress and White House have surely heard reaction from those Ruling Class readers who take Paul Volcker very seriously indeed.
IT’S WORTH TAKING a moment to recall just who and what Paul Adolph Volcker is. At 83, there is not much that he has not done in the world of banking and international finance, with a couple of rescues of the American economy along the way. Trained at Princeton, Harvard, and the London School of Economics, he was presumably totally in sync with the wet Keynesians who have gravitated to Democratic administrations for the past 50 years. His early years were spent advancing through various analysis positions in and out of the New York Federal Reserve Bank, Chase Manhattan, and the U.S. Treasury. Yet when the global currency market collapsed in 1971, Volcker was credited with steering the Nixon administration through the delicate shoals of cutting loose gold’s stranglehold on the dollar and building the new international convertibility regime that exists today. His reward for that was the presidency of the New York Fed Bank, a post he held until Jimmy Carter made him chairman of the Federal Reserve.
Time has flattened somewhat our memories of just what a dismal economic pall paralyzed the hapless Carter. Any prospect of renewed growth was being smothered by double digit inflation, that is, until Volcker adopted the decidedly un-Keynesian tactic of choking off the very credit expansion that was fueling the price frenzy. Volcker and his tactics were roundly hated. Farmers used tractors to block the entrance to the Fed headquarters. Home builders flooded the Fed’s mailroom with letter-sized blocks of two-by-fours on which they mailed their protests; Volcker used them in his office fireplace and gleefully pointed out he was following Carter’s pious injunctions about saving energy. Despite that triumph, Volcker’s reappointment by President Reagan in 1983 was done grudgingly and his refusal to endorse an early push to deregulate Wall Street led to his replacement by the doctrinally sound but ill-starred Alan Greenspan four years later.
In the last 20 years Volcker has kept his ticket to the luxury boxes of the Ruling Class by undertaking missions for the United Nations, serving as a personal financial adviser to the Rockefeller family, and being a regular attendee at the sacred rites of such conclaves of the mighty as the Group of Thirty, the Trilateral Commission, and the Bilderberg Group. But Volcker’s influence and reputation comes from his refusal to preach to the lesser choir members of this community — the apparatchiks who burrow within academia and at the foundations of the left. Volcker’s economic philosophy, it turns out, is one of small “c” conservatism when it comes to financial markets in general and Wall Street’s sell-and-be-damned ethos in particular.
To understand Volcker one must go back to Professor Codevilla’s spot-on observation, “Differences between Bushes, Clintons, and Obamas are of degree, not kind.” His proof is that Republicans in power never roll back the very intrusions of big government just installed by the Democrats. In such a world, questions of what is liberal versus what is conservative are not useful. When I say Volcker’s economic philosophy is conservative I mean cautious, imbued with 50 years of experience with how addicted and reckless men can become in the pursuit of money. While Ronald Reagan was sincere in his belief that deregulation of Wall Street would lead to innovative progress, he also was being influenced by Donald Regan, the former bond hustler. And when Bill Clinton finally did ratify the dismemberment of the Depression-era Glass-Steagall barriers between commercial banks and investment banks, he was being nudged along in his ignorance by such water carriers for the investment house churn-and-burn set as his Treasury Secretaries Robert Rubin and Larry Summers.
Volcker responds to the notion that deregulation automatically leads to innovation and healthy growth with a snort of derision, often saying “the only useful banking innovation was the invention of the ATM.” By long experience Volcker also realizes a coherent set of enforceable rules is the only guarantee that Wall Street — or any marketplace — can freely function.
LIKE MOST OF THE AMERICAN Big Business subset of the Ruling Class, the really big shakers on Wall Street have always wanted the kind of government that can be relied on to bail them out but also to impose some kind of certainty as long as those restraints don’t really chafe. The Dodd-Frank bill raises more questions than it answers about either certainty or restraint, and Volcker’s worries are surely being replayed to Mr. Obama by people to whom he must listen if he is not to suffer Jimmy Carter’s fate.
So Volcker has little to fear by way of reprisal by the White House; indeed in the post-election aftermath his influence and his person may be even more visible than before as Mr. Obama realizes his initial in-house team has not done much to improve his prospects for 2012. The departure of such economic advisers as Summers and Christina Romer offers an opportunity for Mr. Obama to appoint advisers who will pursue more than a sham recovery of rising stock prices and bank profits.
But will the president turn to Volcker on Wall Street reform or anything else? It’s a plausible bet. After all, as Professor Codevilla has pointed out about securing membership in the Ruling Class, “Once an official or professional shows that he shares the manners, the tastes, the interests of the class, gives lip service to its ideals and shibboleths, and is willing to accommodate the interests of its senior members, he can move profitably among our establishment’s parts.” Even in opposition.
By way of disclosure, I have been an admirer of Paul Volcker since I first covered him when he returned from Wall Street to become an undersecretary of the treasury for international monetary affairs and to play a key role in the Nixon administration’s shift away from the collapsed Bretton Woods monetary system. Although Federal Reserve chairmen never give press interviews that can be remotely quoted or alluded to, when Volcker took that job he would allow me — under the strictest constraints — to come to him and ask often fairly stupid questions about finance that baffled me. Those tutorials, laced with his profound knowledge and healthy skepticism, are among my prized memories. I would not be alone in rejoicing if I thought Mr. Obama was finally paying attention to his advice.