Secrets Of The Fed Dallas Fed President Interviews Former Federal Reserve Chief Paul Volcker

 

Former Federal Reserve chairman Paul Volcker thinks a lack of discipline in financial markets and speculative banking investments led to the financial crisis of 2007-08. That’s what he told a roomful of fellow economists and business leaders last night at a global economic conference at the Federal Reserve Bank of Dallas. Dallas Fed president Richard Fisher led a question-and-answer session with Volcker, who is best known for taming inflation in the 1970s and 1980s and, more recently, helping to pass a federal regulation restricting U.S. banks from making risky investments that could lead to their failure.

Volcker, 87, was Fed chairman under presidents Jimmy Carter and Ronald Reagan from August 1979 to August 1987. Most recently, he led Pres. Barack Obama’s Economic Recovery Advisory Board (2009-11) on how to revive the economy.

 

Here’s a synopsis of the Q&A:

 

Fisher: Did the nation’s transition to a gold standard in the 1970s inevitably lead to inflation?

 

Volcker: We certainly had a lot of inflation then. It was unbelievable how much inflation then– double digits never seen before. Roosa did not think you could float the dollar in the face of global pressures.

 

Fisher: You recently called for a Bretton Woods system [a post-World War II monetary system that made the U.S. dollar and other currencies pegged to it convertible to gold]. Talk about that.

 

Volcker: I’m back to the same argument. When you look back at the most recent crisis, a lot went wrong. The market itself went wild. Perhaps the Federal Reserve was not quite as disciplined as it might have been. In a speech, I said we are on an unsustainable course. I do think it was the lack of discipline in markets that led to financial disaster. I had never heard of subprime mortgages. Today, we’re missing two things: A sense of discipline in the nation’s financial system and an interest rate adjustment. We need an institutional structure that can provide warning signals when needed.

 

Fisher: What are you views on rules-based monetary policy?

 

Volcker: The only rule I like is that the Fed is supposed to maintain price stability.

 

Fisher: Can you bring us up to date on your banking efforts?

 

Volcker: There is a provision in Dodd-Frank that makes bankruptcy of a bank easier and less disruptive — to inject just enough money in a failing bank to keep it operating … then to take the pieces apart and either liquidate it or sell it. Lots of progress has been made at the Fed and the Bank of England to help keep banks going temporarily without disturbing the whole system. I think it’s fair to say the United States government is not operating at maximum efficiency today. There’s a lot to be done in my view … revising the financial regulatory system in the United States. We’re hard at work on this.

 

Fisher: What is your overall feeling about the U.S. central bank?

 

Volcker: I consider myself the Joe Louis of the Federal Reserve, always defending himself. The Federal Reserve maintains a respect and independence that is very unique. I have to admit if you took a survey that opinion is not as strongly felt today as 10 years ago because of the [financial] crisis. Banking and financial systems must be part of monetary policy. If you have a broken financial system, you’re not going to have a sensible monetary policy.