Paul Volcker: central banks should not loose focus on inflation
6
The legendary Fed-chairman Paul Volcker on the dollar, US economy and inflation.
In April 2005 you said ‘the circumstances seem to me as dangerous and intractable as any I can remember’. Is that now more or less the case?“
I was referring to the situation of excess spending in relation to our ability to produce, our large current account deficit and big import of capital from abroad. That was an uncomfortable situation and clearly not sustainable. My analysis was that sooner of later the US would have a crisis on its hands and now we have one. My hope is that out of this turmoil we will actually begin to see some adjustments that are necessary.”
What are those?
“The housing bubble is behind us. The consumption in the US has to slow. The US exports are doing fine, excluding oil imports our current account deficit is declining. The weaker dollar also helps in that regard. That is the good news.”
What is the bad news?
“We are now in the midst of a very difficult situation on the financial markets. That raises uncertainty. So far the economy has not plunged, but the possibility of a real recession in the US is clearly there. Recession may be an inevitable part of the adjustment the American economy has to make.”
Will it be a mild and short one?
“Economists are not very good forecasters. It is likely that it will take the US economy quite a long time to get to a strong growth path because of these adjustments. They have started but they are surely not completed. What will follow is a period of low growth of may be even no growth in the US and sustained economic growth in Europe, Canada, Latin America and Asia, so that the US current account continues to decrease. This might take a couple of years.”
The US dollar has been losing ground for quite some time. Is the fall over?
“The dollar has probably been too strong, given the imbalances in the US economy and strong growth in other parts of the world and it was inevitable that the dollar would fall. What I would like to see is more stability. Instability of the dollar is neither good for the US nor for the rest of the world. You see that in Europe. Europeans decided there was a limit to how much volatility in the exchange rate they could have. Given the close economic relationship between European countries, Europe needed stability on the exchange rate front. The only way to get rid of exchange rate instability is to get rid of the exchange rate. That is why Europe created an economic and monetary union and I would say: you were right to do that. Most US economist were extremely sceptical, they said it would never work. “
What kind of future do you see on the currency front? Will globalisation lead to more regional currencies?
“In time we will have an euro bloc, a dollar bloc and in the future perhaps also an renminbi bloc in Asia. I used to say that that might happen in my lifetime, but my life expectancy is shortening. But it will happen during your lifetime.”
Alan Greenspan, your successor at the Federal Reserve, recently said that what is happening now is the worst crisis in 50 years time. Do you agree with him?
“I don’t know if it is the worst. It is certainly without any question the most complicated financial crisis we have had. It reflects the new system with machinations of new products such as CDOs, SUVs, SIVs, conduits, derivatives, options, swaps, swaptions, you name it. Together, they have created numerous linkages between financial institutions and that makes people uncertain. The new system, despite all of its acclaims has failed the test of the market place. It is the most complicated and significant financial crisis. Whether it turns out to be the worst economic crisis in 50 years remains to be seen.”
What is your feeling about the Feds actions with regard to Bear Stearns?
“There is lot of debate whether that was a good or a bad move. I feel it was a necessary thing to do, because of linkages between financial institutions. Bear Stearns was very big in the market of new derivatives and other products. The interconnections made other institutions sensitive to attacks. I feel that the actions of the Fed, but also of the Bank of England before with Northern Rock, have provided some reassurance to the market.”
No negative effects then?
“There are those as well. The actions have raised a lot of fundamental problems.”
Such as?
“For example the question how far does the responsibility of the government and the Fed go to rescue banks and companies that are in trouble.”
What are the implications in the long term?
“The expectation has been created that the Fed will protect important financial institutions if they get in trouble. We cannot leave it just the way it is now. The logic of the situation is that if you are to protect institutions, you have to regulate and supervise them. That raises a lot of questions; it is easy to say but hard to put it into practice in such a way that it preserves free interaction in the market.”
The debate in the US is which institution should become the new regulator. Is that the central bank or the Treasury?
“I have worked both at the Fed and at the Treasury, so I think I have some perspective on the subject. The Fed is the lender of last resort and it is natural then to have some supervisory and regulatory responsibility. I think the Fed should be in the position to oversee the financial sector.”
Why the Fed?
“It is independent and as such free of some political pressure many other regulators are under. The Fed should be able to take a somewhat more balanced, long term view.”
You once said that in the 70s inflation was viewed as the least of evils. In the 80s the general take was that inflation is a bad thing. Do you feel the world is slipping back towards the 70s in that regard?
“The world has learned a very good lesson in the 70s and 80s. Low inflation has become a part of central banking ethic and thinking. The public also generally thinks that inflation is not a good thing. The lesson is not forgotten, but time passes, the high inflation times and problems that go with that seem like yesterday to me, but many people in the market were not even born then, so presumptions are different. I think we need to be reminded once in a while that inflation is an enemy and if you let it creep up onto you, sometimes it creeps up faster than you want. Central banks in various parts of the world have tried to protect themselves by introducing inflation targets, such as maximum of 2 percent in the euro area for example. They say: ‘our credibility depends on us meeting the target’. I sometimes wonder why the central banks target inflation when they are supposed to target price stability. Whether we are slipping back, I think the test is in front of us. I think recent comments from the Fed on inflation are reassuring.”
Do you see any similarities with the 70s and 80, when you had to combat high inflation?
“We have these rising oil and food prices resembling somewhat the early 70s. Central banks should not loose focus on inflation when the economic growth is slow. You do not want temporary inflation to become entrenched. These times are a major test case for central banks.”
What is fundamentally different now in comparison with the 70s?
“The old fashioned commercial bank function has been minimized and the market functions are more dominant. Trading has exploded since the 70s. In the US, bank credit used to be the large portion of the total credit business which is no longer the true. Those changes underlie the recent actions by the Fed. The old theory was that of you protect and stabilize the banking system, you do not have to worry about the rest, that can take care of itself without harming the economy. That is no longer true and that is why the downside seemed so big when Bear Stearns was in trouble.”
Central banks should be as boring as possible you once remarked. What did you mean by that?
“Did I say that (laughing)? What I meant is that, ideally, an economy should have steady economic growth, no bubbles, reasonable price stability and expectation that price stability will persist. That is pretty boring. I used to get bored once in a while at the Fed when things were going well. Central banks today are not boring, with the crisis. The blood and adrenaline flow now.”
Recently you endorsed Barack Obama. Why?
“I felt there was too much bickering, too much political impasse, too much lobbying for narrow interests, too much money and too much influence. The outcome is an erosion of faith and confidence in the government. Senator Obama has a vision that is a fresh approach with some chance of bringing the country together in a constructive direction.”
Why did you feel the need to endorse any candidate, you never did it before?
“After 30 years in government, serving under five Presidents of both parties I have been reluctant to engage in political campaigns. The time has come to overcome that reluctance. I am concerned about the direction this country has taken, both internally and externally. I thought we needed some change and someone to bring us together.”
What are your major concerns?
“I am 80 years old. I grew up in the Second World War and entered the government after the war. I thought then the US had a constructive mission in the world: to develop international institutions, foster global trade and lead what was known then as the free world. There was a lot of respect for the US. I think we have lost some of that. Partly because other countries rose, but partly the US self inflicted it. The war in Iraq is an example. We have given the impression of unilateralism and abruptness that is inconsistent with the kind of leadership I would like to see in the world.”
Reactie(6)
Volker is definitely part of the Bilderberg World Government camp. The USA needs to stay the USA and legal tender laws need to be revoked. I would be wary of the SKF ETF. The counter party to that is Lehman brothers and if the financials tank so might your counter party. Buyer beware.
Dan maar HIER mijn reactie op het stukje EN NU is het genoeg geweest ECB. Voor dit stukje gaan mijn handen op elkaar. Huzza! Overigens ook voor dit interview met de enige echte Maestro.Dat kwart puntje van de ECB zat vorig jaar zomer al in het vat. Werd als gevolg van de kredietcrisis almaar uitgesteld. Nu is het er. Te laat, te weinig! Indirect is die invloed van brallende ClubMed politici er wel degelijk. Horen we iets van onze Hollandse wetgevers? Ze gooien met hun 1% btw-verhoging en accijnsverhogingen nog wat brandstof op het inflatie-vuur. Kan het nog dommer?
mooi interview edin..
What to do:
1. Buy many 1 ounce gold coins, store them at home.
2. Buy the ETF SKF (double inverse on financials).
3. Buy a very cheap house in a very cheap town in the midwest, pay cash.
4. When you lose your job, move into the house and try to make your investment income last as long as possible.
5. Let the storm pass, get a job, and buy a house while everyone else is still too scared to.
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