Paul Volker has agreed to lead a new White House economic advisory committee for President-elect Barack Obama [source]. Volker was appointed Chairman of the Federal Reserve by Jimmy Carter in 1979. The Fed Chairman is arguably the most powerful man in the world. Whereas the office of president functions under a system of checks and balances and is practically powerless without congressional approval, the Fed Chairman can single-handedly destroy the American economy nearly overnight, if he so desired. The Fed Chairman can almost instantly change Fed and bank reserve requirements, the Fed discount rate which then affects all interests rates in the country, and open market operations and the money supply via government bonds.

Anytime you hear about Paul Volker in the media, especially now that he is on the Obama train, you will only ever hear that he “is widely credited with ending the United States’ stagflation crisis of the 1970s by limiting the growth of the money supply, abandoning the previous policy of targeting interest rates. Inflation, which peaked at 13.5% in 1981, was successfully lowered to 3.2% by 1983.” [source]

What you will not hear, is that these actions were very reckless and his drastic increase in the discount rate up to an unheard-of 15%, while quickly strangling inflation, caused a 10% unemployment rate, only the highest our country has seen since the great depression. He alone largely contributed to the significant recession the U.S. economy experienced in the early 1980s and “Volcker’s Fed also elicited the strongest political attacks and most wide-spread protests in the history of the Federal Reserve (unlike any protests experienced since 1922), due to the effects of the high interest rates on the construction and farming sectors, culminating in indebted farmers driving their tractors onto C Street NW and blockading the Eccles Building” [source]. Furthermore, Volker’s dramatic increase in interest rates “helped the elite maintain value in their assets but strangled the working class as credit dried up” [source].

[Volker put] his mark on Fed policy by raising the discount rate a full percentage point while emphasizing that killing inflation was his number one priority. Volcker realized he risked putting the economy into recession…Into early 1980 interest rates across the board continued to rise and the economy tipped into recession…Upon taking office, Ronald Reagan said that the country faced the threat of economic calamity. But many would say his preferred policies of tax cuts would encourage spending and investment and thus hamper Volcker’s effort to kill inflation, once and for all.

Reagan, though, certainly understood the importance of ending the inflation threat and he was willing to endure a deep recession to accomplish this. Already, early in 1981 there were reports that he would be a one-term president.

But while Reagan would remark at cabinet meetings, “Why do we need the Federal Reserve at all?” he let Volcker operate with little interference.

By July 1981 the nation was in recession, and it would be a long, ugly one. [Economists choose November 1982 as the month the recession ended.] The manufacturing sector was decimated plus the combination of high interest rates and an expensive dollar sharply reduced American exports, particularly hurting farmers. In 1982 the unemployment rate hit 9.7%.

Reagan didn’t waver. He insisted that if the nation “stayed the course” it would emerge healthier and more prosperous in the end.

Meanwhile, Paul Volcker stuck to his own guns, convinced that firm control of the money supply was the key to a sound economy. And inflation was heading lower. A CPI that registered 13.3% for 1979 was to plummet to 3.8% for all of 1982.

The stock market, which had reacted positively to Reagan’s victory in November 1980 with the Dow Jones closing at 953 on the first trading day after the election, was to become a victim of the deep recession of ’81-’82 as well. By the summer of 1982 the Dow would plummet to 776 on August 12. But Volcker was increasingly convinced that the time was near to reverse course. [source]

It was Volcker finally implementing Reagan’s economic policies that revived the economy. He resigned from his post in 1987 and Ronald Reagan appointed Alan Greenspan to finish up Volker’s unexpired term, who then went on to serve an additional full 14-years until reaching his term limit in 2006. Greenspan was retained by Clinton who, for the most part, continued Reagan’s free market economic policies, which along with Greenspan, were the driving forces behind the strong economy of the 1990s that is instead credited by the media solely to Bill Clinton. But of course! He is a democrat, after all. I’m sorry to break it to you libs, but any remnants of Reaganomics that made it through Clinton and Bush will be sought out and eliminated for good by Obama. Which means if you’re hoping for the strength of the late 80s and 90s all over again, it isn’t going to happen.

Via his extremely high interest rates, Volker broke the back of inflation, but nearly broke the back of America and her workers in the process. It seems to me more and more that between Obama’s tax plan and now his economic advisers, the very people that Obama claims to represent and give hope are the ones who will be the first to lose their jobs and suffer the most. A second term of Jimmy Carter doesn’t seem much like change to me.

In his book, A Brief History of Neoliberalism, David Harvey writes that Volker personified one of the key facets of the neoliberal era.

[Volker] engineered a draconian shift in U.S. monetary policy. The long-standing commitment in the U.S. liberal democratic state to the principles of the New Deal, which meant broadly Keynesian fiscal and monetary policies with full employment as a key objective, was abandoned in favour of a policy designed to quell inflation no matter what the consequences might be for employment. The real rate of interest, which had often been negative during the double-digit inflationary surge of the 1970s, was rendered positive by fiat of the Federal Reserve. The nominal rate of interest was raised overnight … Thus began ‘a long deep recession that would empty factories and break unions in the U.S. and drive detour countries to the brink of insolvency, beginning a long-era of structural insolvency’. The Volker shock, as it has since come to be known, has to be interpreted as a necessary but not sufficient condition of neoliberalism.

In supporting Henry Paulson’s bailout package, Volker would not re-regulate the banks nor provide more power to shareholders, he’s simply carry on one facet of neoliberalism: tightening federal budgets which inevitably will put great budgetary pressure on federal agencies. [source]

Smart pick for an economic advisor? Well, I certainly hope Volker at least learned from his mistakes.

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