The Old Fashioned Fed Chair
Trump versus Powell has been all the talk lately, with Tweeter Dee, Tweeter Dum claiming "The only problem our economy has is the Fed. They don't have a feel for the market," the president said on Twitter. "The Fed is like a powerful golfer who can't score because he has no touch - he can't putt!"
Trump is all apoplectic even with the Fed raising the fed funds rate less than 200 bp since December 2016. It’s hard to imagine what the president would tweet if Paul Volcker was working at the Eccles Building.
Trump would like Volcker’s height, 6 foot 7 inches, as opposed to Janet Yellen, who was fired for her lack of it, at 5 foot 3 inches. However, while Trump has his eye on the stock market, Volcker always kept his on the price of gold. The ex-Fed Chair mentions the yellow metal often in “Keeping at It: The Quest for Sound Money and Good Government.”
Volcker, who served as Fed Chair from 1979 to 1987, famously doubled the fed funds rate in March 1980 from 10.25 percent to 20 percent to break the price inflation created by the Arthur Burns Fed and then-president Nixon’s untethering the dollar from gold. He kept the rate above 16 percent until May 1981.
In this era of ZIRP and Trump’s hissy fit over 175 basis points worth of rate increases, a 20 percent fed funds rate seems unimaginable. Volcker has no PhD in economics and doesn’t remember a Keynesian influence at Princeton. His senior thesis criticized central banks for secumming to political pressure to keep interest rates low. He still believes the Fed’s doctrine that two percent inflation is an appropriate policy goal is nonsense. It wasn’t in his textbooks and he writes, “I know of no theoretical justification.”
So what was in his textbooks? His money and banking and economic theory courses were “taught by distinguished refugee scholars of the classic Austrian liberal school of economics, Oskar Morgenstern and Friedrich Lutz.” Morgenstern and Lutz “emphasized the works of free-market advocates, including Ludwig von Mises and Friedrich Hayek from Eastern Europe.”
Young Volcker’s research for his thesis started with Walter Bagehot, included the “real bills doctrine” and Knut Wicksell’s “natural rate of interest.” Volcker attended Harvard to complete his graduate studies and while Keynesianism ruled the campus, “there were bridges to the older Austrian tradition,” he writes. “Gottfried Haberler and Willy Fellner taught international trade and finance and advanced theory.”
Volcker understood inflation better than some of his professors. “And what was the economic purpose,” the ex-Fed Chair writes, “and for that matter the morality, of the government inducing chronic inflation--intentionally debasing the nation’s currency a little every year? My mother would see through that.” No other Fed Chairs seem to get it.
Early in the book, Volcker sounds almost hardcore Austrian; the “Sound Money” part of the sub-title. Then, there’s the “Good Government” part. He admits government tries to do too much, but claims Ronald Reagan said “government is, in fact, necessary.” Too much of the book focuses on Volcker’s plea to train students to work in government and that the secret to good government is good management.
The author served at many posts during multiple financial crises: Continental Illinois, the S & L crisis, the Latin American meltdown and the Chrysler bailout. One would think a large share of the book would be devoted for Volcker’s unique perspective to these crises. Instead, only 5 percent of Keeping at It, one chapter, was devoted to these episodes: Nothing to see or learn here, let’s move on.
The book does have some cute anecdotes. Like Rothbard and Rand, Volcker never drove a car. When he took the Fed Chair job, Volcker’s wife didn’t come with him and he stayed in a dorm room, his salary just north of $55,000 a year. The image of the 6’7” Volcker living in a sparse dorm room at night, while cranking interest rates to the sky by day, makes me smile for some reason.
Mises Institute president Jeff Deist pointed out recently on mises.org that Murray Rothbard gave Volcker no praise and that the ex Fed Chair is no Austrian. However, Volcker acknowledged the insights of the Austrian school in a Q & A on Youtube from a few years ago. And, Deist’s former boss Ron Paul, said, "If I had to name a Federal Reserve chairman that did a little bit of good, that would be Paul Volcker."
Volcker received good training and he “did a little bit of good,” while every other Fed Chair has done lots and lots of bad. As far as his book goes, it too, is a little bit good.