Paul Volcker Slams The Fed: "The Kind Of Stuff That You’re Being Taught At Princeton Disturbs Me"

There is a reason that of all Fed Chairmen since the Fed lost its independence at the Fed-Treasury accord on March 3, 1951 (contrary to the widely, and erroneously, accepted conventional wisdom that the accord gave the Fed its freedom as we explained two years ago), Paul Volcker is by far our favorite (and yes, this is most certainly picking the least of countless bubble-inflating evils).

One such reason is that he still gives interview such as the following with the Daily Princetonian (he himself is a Princeton grad, class of 1949), in which he tells the unabashed truth "The responsibility of the government is to have a stable currency. This kind of stuff that you’re being taught at Princeton disturbs me." Aka common sense 101, sadly precisely the one commodity that the Federal Reserve in its scramble to delay the moment of total collapse is unable to print.

We wonder what that other infamous Princeton graduate, Ben Bernanke, would have to say about Volcker's statement at one of his $250,000/plate dinners with the people he made from millionaires into billionaires.

The Daily Princetonian spoke to former chairman of the Federal Reserve Paul Volcker ’49 following a panel discussion in which he participated, titled “Are financial institutions too big or too big to fail?” At the panel, Volcker criticized universities like Princeton for allegedly teaching students how to cheat the financial system. Here is the interview.

The Daily Princetonian: Do you think the Federal Reserve went far enough in stabilizing the banking system?

Paul Volcker ’49: No, I’m not going to answer a question like that.

DP: Pretty recently, some economists have suggested that the central bankers took [the threat of] inflation too seriously.

PV: I’ll give you a simple answer. The responsibility of any central bank is price stability. I was at the helm at that time. Price stability is two percent inflation, which we can’t closely control anyway. They ought to make sure that they are making policies that are convincing to the public and to the markets that they’re not going to tolerate inflation.

DP: And does high inflation matter as long as it’s expected?

PV: It sure does, if the market’s stable. And if it is expected, then everyone adjusts, and it doesn’t do you any good. The responsibility of the government is to have a stable currency. This kind of stuff that you’re being taught at Princeton disturbs me. Your teachers must be telling you that if you’ve got expected inflation, then everybody adjusts and then it’s OK. Is that what they’re telling you? Where did the question come from?

DP: Okay. Could you talk a little bit about the justification behind the Volcker Rule and the effect you think it’s had on the market?

PV: The rule is that institutions that are protected by the government, implicitly or explicitly, should not be engaged in speculative activities that bear no real relationship to the purposes for which banks are protected. Banks are protected to make loans, they’re protected to keep the payments system stable. They’re protected so you have a stable place to put your money. That’s why banks are protected. They’re not protected to engage in speculative activities which led to risk and jeopardized the banking system. That’s the basic philosophy. I think it’s pretty well-accepted.

DP: And do you think there’s still a lot of work to be done?

PV: Not that I know of. You have a regulation environment standing in. It’s a pretty tough regulation. Like every regulation, it’s dependent on the ability and willingness of the supervisor to enforce it. And they have all the power and authority they need, if they’re willing to do it.

DP: Okay. And to get back to the central banking a little bit, given the trade-off between inflation and unemployment –

PV: I don’t believe that. That’s my answer to that question. That is a scenario and a delusion, which economists have gotten Nobel Prizes twenty years ago to disprove.

DP: And as far as moral hazard goes, do you think that in practice banks are going to recklessly avoid taking into account risk?

PV: That depends upon the regulatory system. And that goes back to compensation structures and so forth. So, I do think that it is a danger when big banks that are perceived as too-big-to-fail are taking advantage of the banks that are small ones.

DP: What are the most important things left to be done or to think about?

PV: In the area of financial regulation?

DP: Yes.

PV: A lot’s been done. What needs to be done is to enforce it. This business of the resolution process [of resolving the affairs of insolvent banks in an orderly fashion], whether you’re talking about the FDIC or the Federal Reserve, there’s a lot of work being done, and it’s not complete, but then again, otherwise, we’ve got to reorganize the supervisory system. There are too many holes, too many overlaps, too many opportunities for regulatory capture from the affected industries. That should be reformed.

Comments

[USGrant]

The average increase in US money supply M2 was about 6.2%per year from 1950's though 2008. Some of that printing probably got siphoned off overseas but the price inflation rate has been more than 2% as mesured by gold, oil, etc. Now the question is what the hell is money? Money seems to be irredeemable debt of all durations and it is expanding at a fantastic rate. It is only a matter of time and the world passes back through the looking glass.

[Kilobar]

2% annual inflation cannot inherently be stable. If you compound it year over year it is an exponential fail.

[BrosephStiglitz]

DP: Okay. And to get back to the central banking a little bit, given the trade-off between inflation and unemployment –

For real?  Is this an economist?  I thought Princeton was Ivy League.  The Phillips Curve was/is a transitory relationship that disappeared after the 1970s in the US.  Even Monetarists agree.  What happens in the make-believe paper economy, and the real economy are two very different things.

Who are these fucking clowns?

Also: Dear Mr. Volcker.  Not all economists are indoctrinated Keynesian zealots.  Unfortunately most of the ones who claim to have an issue with these models get greeted with derision and disdain as I did the other day.  (A colleague suggested that the US was in a liquidity trap and that Abenomics was awesome...which is something I have vehemently opposed since 2013.)

If you want to talk about moral hazard, lets talk about the moral hazard of being a relatively critical thinker in a profession with a massive herd mentality.  I'll be the best informed, unemployed economist around.

[Obaminator]

I just went to buy sausages (made fresh) and hamburgers (same thing) from a store Ive been doing so for years...prices earlier this year were 2.99/lb and 3.99/lb...they are now literally in the past month...4.99 and 6.99...not quite a double.

Ahhhh...what a measly 2% does over time when it springs back to catch up on things that lagged behind.

and anyways...we KNOW for Fact it Aint been no 2% for quite some time.

[RMolineaux]

Volcker comes on strong and correct, as usual. 

But his comment on the connection between unemployment and high interest rates is challengeable.  Not mentioned (in this brief interview) is the fact that the Fed is required by law to do what it can to reduce unemployment.  Volcker suggests that the Fed is not able to do anything in this matter.  Perhaps he is right in saying that this is true when the Fed purposely attempts to reduce unemployment directly.  If this is true, then a lot of the argumentation used by Bernanke and Yellen before congress is not valid.  But it is hard to escape the fact that unemployment increased in the late 70's and early 80's when Volcker was raising interest rates to rein in inflation.

I disagree somewhat with Tyler's take on the Treasury/Fed accord of 1951.  Examining Fed behaviour before and after that event shows that the Fed had more freedom of action after than before.  Perhaps he means that the Fed lost its government protection and was captured by the commercial banking system - in which case I would agree. 

[USGrant]

The Fed has always been a private holding of European big money. There has never been a real change since its inception. It was only Andrew Jackson and Aaron Burr that saved the US from this fate in the 1800's.