As Fed chairman, Paul Volcker made everyone mad
Federal Reserve Chairman Jerome Powell has but one highly prominent critic — albeit a president who is prolific on Twitter — attacking him. Paul Volcker, the former head of the U.S. central bank who died yesterday at the age of 92, made everyone mad.
Volcker had the White House, Congress, farmers and home builders simultaneously furious with him during his quest to slay the inflation dragon.
“Everyone was really after him. There are famous stories of people even sending him their car keys because their car loans were so expensive,” said William Silber, who wrote the biography “Volker: The Triumph of Persistence” (2012).
Soon after he became Fed chairman in 1979, Volcker pushed interest rates into unprecedented levels — the prime rate soared as high as 21.5% — to get runaway inflation under control.
See also: Paul Volcker was the last Fed chairman who said no pain, no gain
Consumer-price inflation had grown progressively gotten worse in the 1970s, spurred by the OPEC oil-supply shock and easy monetary policy at the beginning of the decade. By the end of the decade the CPI was nearing a 20% annual rate.
Soon after Volcker pushed rates up, unemployment hit 10.8% and the economy lapsed into recession.
While inflation soon fell back to Earth, the damage was done, and Volcker had made countless enemies.
Home builders mailed bricks and 2-by-4s to his office. Farmers surrounded the Fed’s headquarters. Members of Congress were incensed with the economic pain caused by the higher rates and threatened to impeach him.
Rep. Henry Gonzalez, Democrat from Texas, told Volcker at a hearing that he had “legalized usury beyond any limits imaginable.”
Silber said that Volcker was able to withstand the pressure because “he believed deep down that everyone understood inflation was Public Enemy Number One.”
President Jimmy Carter, who had appointed Volcker, was swept out of office. Later, Carter described his decision to appoint Volcker as “a tough one.”
President Ronald Reagan and his advisers were also wary of Volcker.
In his memoir, Volcker described a secret meeting with Reagan and his chief of staff, James Baker, in 1984, at which Baker pressured him not to raise interest rates until after the president had won re-election.
The Reagan White House stocked the Fed with loyalists — appointing four of seven Fed governors — who challenged Volcker’s leadership. Faced with this internal opposition, Volcker resigned near the end of his second term in 1987.
“Volcker thought inflation was so bad because it undermines trust in government. It’s something I’ve never heard anyone else focus on,” Silber said.
“That’s why he never supported an inflation target of 2%. Once you start saying 2%, where do you stop?” Silber said.
Volcker later said he’d had an inkling that the financial crisis of 2007-08 was looming.
In an interview with Harvard economist Martin Feldstein in 2013, Volcker said he saw a “doomsday scenario” of low interest rates and money pouring into the U.S. from Japan and China.
“It got out of hand and collapsed in a way I wasn’t anticipating particularly, but it did,” he said.
In the wake of the crisis, Volcker pushed for strong new regulation of Wall Street. He wanted one supervisory regulator to oversee Wall Street. And he championed a rule, which ended up named for him, that would prohibit banks from using their own accounts for certain types of short-term trading, and he saw it enacted into law.
Bankers had hated the rule ever since it took effect in 2015, and this year Republicans led a successful effort to ease the Volcker rule’s compliance burden on banks.
In an interview with MarketWatch in 2017, Volcker lamented that Wall Street had lost the discipline that came after the Great Depression.
The former Fed chairman said that, when he started his career, bank executives wouldn’t pay bonuses to individuals because it created the wrong culture. “You can’t imagine a bank these days debating that,” he said.
In a statement, Fed Chairman Powell said he was saddened by the news of Volcker’s passing. “He believed there was no higher calling than public service,” Powell said.
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