
Paul Volcker has died - kaboro
https://www.nytimes.com/2019/12/09/business/paul-a-volcker-dead.html
======
SkyMarshal
Volcker taught the world how central banks should reconcile their multiple,
sometimes conflicting mandates to effectively manage monetary policy.

When he became chairman of the US Federal Reserve in 1980, the US was
suffering from stagflation, or stagnation + inflation, which economists
previously believed was impossible to have at the same time.

The fear was that solving stagnation by lowering interest rates would drive
higher inflation, possibly hyperinflation, but conversely that raising
interest rates to solve inflation would exacerbate the stagnation, possibly
into a depression.

Volcker showed that focusing on and killing inflation by raising interest
rates, even to extreme levels (briefly up to ~20%), you end both inflation and
stagnation. For one reason, low, steady, predictable inflation, better enables
businesses to plan, hire and invest.

And that has been central bank policy ever since (though they arguably
mistakenly deviated from it under the latter part of Greenspan’s tenure). As
Bernanke said, “He personified the idea of doing something politically
unpopular but economically necessary.” It’s rare to have such an impact on
one’s field, especially under such adverse circumstances.

~~~
matthewdgreen
The alternative story I’ve heard is that “stagflation” happened to coincide
with a massive surge in oil prices due to OPEC — which are an input to just
about every product we use, hence increasing prices — and Volcker’s
deflationary recession just happened to coincide with OPEC falling apart. But
this alternative explanation seems so obviously different from the lesson in
your post that it can’t be the full story, so I assume there’s some nuance.

~~~
nickbauman
The economist Ha Joon Chang has written extensivly how a somewhat higher
target interest rate, like 5-7%, is actually better overall than the super-low
targets the fed has. Lower interest rates tend to favor financial incumbents
because they make money anyway because they have more and can sit on it, which
implies that the money isn't actually helping develop new value in the market.

~~~
dragonwriter
> The economist Ha Joon Chang has written extensivly how a somewhat higher
> target interest rate, like 5-7%, is actually better overall than the super-
> low targets the fed has.

Better for what circumstances? The Fed doesn't start with interest rate
targets, they start with a dual mandate on employment and inflation control
and set interest rates based on expected results based on that mandate, which
can at times be high and are now low (which is mostly, currently, a sign of
monetary policy compensating for an extended period of defective fiscal
policy.)

~~~
mattrp
Inflation is the only mandate. There’s been a lot of discussion about whether
employment should play into their role. When it does creep in it’s around now
outdated discussions about whether going beyond so called full employment
causes inflation to rise. Clinton was the first to get a fed chair to admit
there was no such thing as full employment and later it was Yellen who really
pushed fed policy to ignore employment levels. There are some out there who
say we are playing with fire by not targeting an employment number and that
sometimes includes me but then I think about the woman in the street I saw
about a year ago. At first I was worried she’d been robbed or attacked, she
was yelling really loudly but as I got closer I realized she was yelling that
she’d finally gotten a job. That would probably never had happened under a fed
that targets an arbitrary 5% unemployment Figure and that is one of the many
criticisms I’ve had for past fed actions that have ignored the little man by
playing god up in their star chamber.

~~~
dragonwriter
> Inflation is the only mandate.

No, it's not. Under the Federal Reserve Act (specifically, 12 U.S.C. § 225A)
there is actually a triple mandate, as monetary policy is to aim to acheive
“maximum employment, stable prices, and moderate long-term interest rates.”

Inflation control (stable prices) is the second listed.

~~~
mattrp
I think it's interesting that this definition of mandate came in 77
immediately ahead of Volker's appointment and he essentially ignored it. The
fed have always had a bit of heart burn over whether their job includes
employment. Even today, there is not an employment target, there is only an
inflation target and its precisely because no one really knows or agrees on
what the employment target should be. I think when greenspan acted to raise
rates, like Volker, he was predominantly concerned about inflation rather than
jobs even though raising rates did cool the economy and reduce jobs. And yet,
neither man or policy was punished for essentially ignoring the employment
component. Now in more recent years, Yellen has been out on the forefront of
pushing the limits of what full employment means but her successor seems to be
more interested in getting the fed back focused onto the issue of monetary
policy. Hopefully this clarifies where I'm coming from...do you substantially
disagree with this assessment or is it just the fact that I confused the issue
by phrasing my argument in a way that seemingly conflicts with the statute?

~~~
dragonwriter
> I think it's interesting that this definition of mandate came in 77
> immediately ahead of Volker's appointment and he essentially ignored it

The Fed chair doesn't unilaterally set policy, and the Fed Board of Governors
in Volker’s term didn't ignore the other parts of the mandate, it just saw
inflation as the biggest risk, for reasons which are pretty easy to understand
in the historical context, even if they were wrong in hindsight.

> Even today, there is not an employment target, there is only an inflation
> target and its precisely because no one really knows or agrees on what the
> employment target should be

That's not entirely true, it's more that it's because they have a very firm
idea of what the employment target should be, but it's not a fixed employment
_level_ but the (dynamically shifting, in terms of employment measures) point
at which further monetary stimulus has little further employment impact but
great inflationary impact.

> I think when greenspan acted to raise rates, like Volker, he was
> predominantly concerned about inflation rather than jobs

Of course; the Board of Governors raises rates when inflation is the greatest
concern, it lowers them when jobs are the greatest concern. They’ll admit that
quite openly, you haven't made some stunning discovery. The understanding
(somewhat simplified) is that there is a range (which moves dynamically based
on other factors in the economy) in which easier money produces more
employment with comparatively little inflationary effect, and a range (in
interest rate terms, a lower level than the preceding range) in which it
produces inflation with little jobs effect, as “full employment” has been
reached (with the reverse effects in each range for tighter money). The Fed,
again somewhat simplified, largely acts on interest rates based on which range
it feels the current situation is in, aiming for the moderate inflation/“full
employment” boundary.

------
notlukesky
“In 2009 Paul Volcker, berating a banking industry that had taken finance to
the brink of disaster, quipped that “the ATM has been the only useful
innovation in banking for the past 20 years”.

From:
[https://www.ft.com/content/052f9310-5738-11e7-80b6-9bfa4c1f8...](https://www.ft.com/content/052f9310-5738-11e7-80b6-9bfa4c1f83d2)

------
rb808
My view isn't full of praise. My family was really affected by the recession
he caused. The recession was brutal and lots of people never worked again - it
caused a lot of pain and despair.

Everyone talks about how taming inflation is so wonderful. Taming mostly
benefited the wealthiest - as interest rates have tumbled asset prices have
soared in value. Ever since working people's salaries have stagnated.
Ironically now people are worried about deflation.

~~~
dnautics
Not sure if you know this, but dropping interest rates is a policy that is
strictly speaking opposed to taming inflation. It in fact _creates_ inflation.
You might have your history wrong?

> Everyone talks about how taming inflation is so wonderful. Taming mostly
> benefited the wealthiest - as interest rates have tumbled asset prices have
> soared in value.

After Volcker's deflationary policy, the authorities got scared from a small
bump, instituted a reactionary inflationary policy, and _that_ inflation has
helped the wealthiest.

> Ever since working people's salaries have stagnated.

That is a designed consequence of inflation:

[https://krugman.blogs.nytimes.com/2010/02/13/the-case-for-
hi...](https://krugman.blogs.nytimes.com/2010/02/13/the-case-for-higher-
inflation/)

> Yet when you have very low inflation, getting relative wages right would
> require that a significant number of workers take wage cuts. So having a
> somewhat higher inflation rate would lead to lower unemployment, not just
> temporarily, but on a sustained basis.

Or, to put it differently, inflation is necessary to cheat the working class
out of the value of their money, in the name of posting good employment
numbers.
([https://en.wikipedia.org/wiki/Goodhart%27s_law](https://en.wikipedia.org/wiki/Goodhart%27s_law)
on a societal scale)

~~~
bullen
> Not sure if you know this, but dropping interest rates is a policy that is
> strictly speaking opposed to taming inflation. It in fact creates inflation.
> You might have your history wrong?

Doesn't this depend on how much of the money supply is debt?

I agree that dropping interest below zero when 99% of the money is debt can be
inflationary, but back then maybe most money was "real" (not debt) and then
dropping interest would have been deflationary?

~~~
dnautics
1) as to 'real'ness, which is not really I think anything I can comment on (or
IMO, any honest economist can) writ large -- in the 80s we were well past
nixon shock when the US detached from the Bretton Woods II.

2) Perhaps you're referring to reserve limits holding back the money
multiplier to a maximum of 10x, which would make it realer than now, when the
multiplier is unbounded?... Even if money is realer, if we have any debt at
all (presumed by the notion of an interest rate lever) you are lowering the
price of debt, which encourages borrowing, meant to or not, which will not
pump M0 but will increase the amount of money that people think they have
(presuming they can be paid back as creditors), or really, the amount of money
that people think they have in their bank accounts that they think their banks
can recover from their leveraged adventures.

3) now probably the real fake labor subjective value of money is neither true
to the austrian nor the keynesian/chicagoan extremes, certainly not the
smith/marx/ricardian absolute (I mean let's say you do something crazy like
save the earth from an asteroid strike, how much was that one hour of looking
at a photograph _worth_ surely not the same as one hour of a worker in a nail
factory), and not really a thing that depends entirely on M0 nor the velocity
of money (an immesurable measurable if ever there was one) in which case who
the hell knows. In the end we're all dead anyways. The three universal truths
are death, taxes, and network splits.

------
setpatchaddress
And now, a word from scrooge:

[https://twitter.com/matthewstoller/status/120405738566232064...](https://twitter.com/matthewstoller/status/1204057385662320641)

~~~
glitchc
A damning indictment of the man. Thank you for sharing this counter-point
analysis.

------
aazaa
A good account of Volcker's tenure at the Fed can be found in "Secrets of the
Temple" by William Greider.

------
anm89
Paul was one of the very few people I consider to be a hero in this world.

He had an unbelievable ability to stand up to the existing power structure by
convincing people he had a better plan and then executing to perfection.

I don't know if it would be possible to have another Volcker in the central
banking world these days but we certainly need one.

------
everybodyknows
From his recent memoir:

'... erosion in what Alexander Hamilton insisted at the very beginnings of the
republic would be the true test of government: “its aptitude and tendency to
produce a good administration.”'

'We embarked on long, unnecessary, and ultimately unwinnable wars far from
home. We failed to recognize the costs of open markets and rapid innovation to
sizable fractions of our own citizenry. We came to think that inventive
financial markets could discipline themselves.'

Free preview, here:

[https://www.publicaffairsbooks.com/titles/paul-
volcker/keepi...](https://www.publicaffairsbooks.com/titles/paul-
volcker/keeping-at-it/9781541788299/#module-whats-inside)

------
iwintermute
[https://www.youtube.com/watch?v=mMN17uBzCw4](https://www.youtube.com/watch?v=mMN17uBzCw4)

Very insightful interview with Ray Dalio

~~~
rb808
Thanks, its great to see a dedicated public servant. Here is the link to his
foundation.
[https://www.volckeralliance.org/](https://www.volckeralliance.org/)

------
bitxbit
Volcker is overrated in my view. There is a good reason why so many people on
Wall Street hold him in highest regard. I believe his perceived success
enabled irresponsible monetary policies over the past 30 years. This is how we
ended up with a 3% bound on a ten-year and trapped into perpetuity.

------
w1nst0nsm1th
Negative interest rates take over the world, Volcker dies... I can't help but
see a connection here.

------
neonate
[http://archive.is/g1cf5](http://archive.is/g1cf5)

------
notkaiho
Not just waging war on inflation, but being the name behind the Volcker Rule,
which prohibits banks from making certain speculative investments, and
arguably inhibits some of the worst excesses of "casino capitalism"

------
cletus
Maybe I'm the only one who feels this way but... If you have to explain who
someone is, is their obituary really a news story?

Everybody dies, some tragically young while others such as Mr Volcker lived
long lives.

There problem is that often these obits ends up being used to further some
agenda (although I don't get that sense here.

~~~
pc86
Many here don't know who he was (I didn't) but nobody outside of our circles
care about Paul Graham or Linus Torvalds, either. I'm sure almost every IB
associate in NYC knows who Volcker is.

Whether _I_ know them specifically or not, I think a former Fed chairman dying
qualifies as news.

