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Master of Disaster – Paul Volcker

Posted by rightwinger on November 26, 2008

Oh no!  This is a nightmare really.  Paul Volcker is the idiot who ran the Federal Reserve during the Carter administration. Hello, 20% interest rates, runaway inflation, and 7.8 % unemployment!!! The spin here is that Volcker helped to tame inflation under ReaganThis is completely false.  He was a holdover from the Carter Administration until Reagan brilliantly appointed Alan Greenspan who led the US through the largest economic expansion in US history.

From Real Clear Markets:

A Carter appointee, Volcker’s attempts to use interest-rate increases to slay inflation in the late ‘70s were met with a great deal more inflation. By February of 1980, with the Fed funds rate at 14 percent, gold hit an all-time high of $875/ounce.

The dollar’s aforementioned fall was of course sped along by another major mistake carried out by Volcker just a few months prior. Correctly recognizing the futility of interest-rate targeting, Volcker shed the latter only to make a fateful decision that would drive the U.S. economy even further into the ditch. Put simply, in October of 1979 Volcker began a three year experiment with Milton Friedman’s monetarism.

Instead of targeting the Fed funds rate, Volcker attempted to target the quantity of money with disastrous consequences. Though inflation is surely a monetary phenomenon as Friedman long noted, with the majority of physical dollars outside these fifty states, attempts to control the quantity of dollars within these fifty states were bound to fail. To the extent that the Fed targeted various aggregates of U.S. money supply lower, this merely meant that dollars in other markets (eurodollars for instance) would fill the shortfall.

Worse, given the Fed’s efforts to control money quantity rather than rates, the Fed funds rate bounced around on a daily basis such that businesses faced an impossible task of raising capital owing to uncertainty about the rate at which they could raise capital. As Charles Kadlec and Arthur Laffer wrote at the time, “the Fed’s action reduced the viability and attractiveness of the dollar,” and as a result its policies “increased the prospects of inflation” in spite of the fact that monetarist targets “resulted in a slower growth in the measured quantity of money.” What the economy needed according to Laffer and Kadlec were “policies that lead to an excess demand for dollars relative to their supply.”

Read the article for yourself.

From NY Times:

Paul Volcker, [***Spin***]who helped tame runaway inflation during the 1980s during two terms as chairman of the Federal Reserve[***Spin***], has agreed to lead a new White House economic advisory committee for President-elect Barack Obama.

Mr. Volcker, 81, has been providing Mr. Obama advice on the economy for months. After briefly considering him for Treasury secretary, Mr. Obama instead asked Mr. Volcker to lead the President’s Economic Recovery Advisory Board, a panel comprised of officials from a variety of business sectors. The group is tasked with providing Mr. Obama advice for how to jumpstart the economy and stabilize the financial markets.

Read the article for yourself.


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