As part of the observance of the 15th anniversary of Book TV, C-SPAN broadcast a trio of book presentations on the stewardship of monetary policy by three consecutive chairmen of the Federal Reserve: Paul Volcker, Alan Greenspan and Ben Bernanke.
First, Francesco Guerrera of the Wall Street Journal interviewed William Silber, a professor of finance and economics at New York University and author of Volcker: The Triumph of Persistence, along with Volcker himself, on Oct. 15, 2012.
Guerrera began by asking whether high interest rates are the best policy for the Fed. Volcker responded by stressing the responsibility of the United States to administer the world's reserve currency during what he called "a glorious period of central banking."
Volcker served as Fed chairman from 1979 to 1987. Now, he mused, the emphasis is on expansion, as the Fed pushes money out into the financial system. He warned that the lessons of past inflation could be forgotten, while noting that even the Fed talks about printing money "within the context of price stability."
He expressed the hope that the lesson would be recalled whenever the time comes for the Fed to withdraw stimulus, which he hastened to say had not yet arrived.
Silber quipped that fostering economic growth while maintaining price stability is like eating right and exercising; easy to say but hard to do. Silber worried that the Fed might not take preemptive action in time to head off inflation.
Asked whether the Fed has gone too far in accommodating political demands, Volcker said we'll know in a couple of years, and he recalled that in the 1930s, the Fed made the mistake of taking too long to provide stimulus and then withdrew it too soon. Now, he fears that having gone through a great boom and bust, the Fed's powers may be exhausted.
When Guerrera raised the claim by Fed officials that they had no choice, Volcker insisted that the Fed should act if it can accomplish something. He lamented that developing nations are complaining about the effect on them of any withdrawal of stimulus, but Bernanke has said the policy is not aimed at the emerging markets, it is an effort to manage the economic circumstance of the United States.
Silber added that the 1980s showed that the United States couldn't have a responsible monetary policy without a responsible fiscal policy. (This comment resonates, given the experience with the debt ceiling stalemate and the government shutdown in 2013.)
Importantly, he warned that inflation has to be nipped before there is overt evidence of it, so it worries him when Bernanke says the Fed will wait to act until inflation shows up. He asserted that the required response might not be a modest increase in a key rate from 1.6 percent to 2.1 percent, but rather from 1.6 percent to 4 percent. At that level, the problem would not be just an economic problem, but also a political one.
Volcker said that no one is even talking about fiscal tightening.
When Guerrera asked whether Volcker had been "strong arming" as chairman, Volcker replied that he was being persistent and that he had "no conviction Congress would act."
Silber referred to evidence in the minutes of the Federal Open Market Committee that Gerry Corrigan, a Volcker protege, had referred to the need to raise rates and the lack of help from fiscal policy. Volcker credited his tightening with spurring Congress to enact fiscal reforms under Gramm-Rudman-Hollings legislation, but he regretted that these did not remain for long.
Finally, Volcker refuted the financial industry's assertion that proprietary trading, which is supposed to be restricted by the proposed Volcker rule, had nothing to do with the crisis, noting that the losses incurred in 2008 wiped out the gains of the previous four or five years and some individual traders lost $5 billion to $10 billion. He traced the chain of causation of the 2008 episode of the ongoing financial crisis from financial engineering to toxic products to undermining the stability of the economy to the housing bust and to compensation of executives in the industry.
Next, the program moved to an excerpt from a book presentation on Sept. 19, 2007, by former Fed Chairman Alan Greenspan of his book The Age of Turbulence: Adventures in a New World. He was interviewed by author Daniel Yergin before a packed auditorium, which included me, at George Washington University.
Yergin asked whether the Fed was responsible for the housing bubble. Greenspan called the evidence against this idea "startling," on the ground that countries around the world experienced a decline in interest rates, which he attributed to the end of the Cold War. He recalled that the Fed, concerned that a 1 percent rate could create a bubble, tried to raise mortgage rates in 2004 and 2005, but failed, and he faulted Americans for thinking that this economy is unique.
Asked whether he takes satisfaction in the embrace of market economics by most of the world, Greenspan allowed that he liked it.
The program concluded with a presentation by David Wessel of his book In Fed We Trust: Ben Bernanke's War on the Great Panic, at Washington's Politics and Prose on Aug. 24, 2009.
Wessel set the stage by recalling that Bernanke had sought to tone down the image of the Fed chairman as an infallible pope, but he had to change his philosophy in response to the events of 2008, as the authorities bailed out Bear Stearns, with the Fed buying $30 billion of paper JPMorgan Chase CEO Jamie Dimon didn't want, an action no one else could have taken.
Fannie Mae and Freddie Mac were taken over in the summer, and the Fed kept lending going. Then, in September, Lehman Brothers failed, Merrill Lynch was taken over with assistance by Bank of America and AIG received an $80 billion bailout. Bernanke proclaimed that he would do "whatever it takes" to keep the economy going, and Wessel pronounced the effort a success.
Asking himself why the Fed failed to see this episode coming, Wessel diagnosed a "failure of imagination" akin to the failure of national security leaders to anticipate that planes would be flown into the World Trade Center, and blamed the worst recession since the Great Depression on extraordinary failures by key personnel and institutions, including executives, risk managers, rating agencies, mortgage bankers, pursuit of fees, politicians and also the Fed.
Wessel concluded that the nation has learned a lot from the experience, including the need for bending the rules and stretching the laws, acknowledging that these measures are "not terribly democratic."
As for where the economy was headed, he foresaw a painful economic recovery and the reappointment of Bernanke to a second term, rather than risking an adverse market reaction to an appointment of Larry Summers or Janet Yellen (he got the candidates right). Further, the country was still vulnerable to a recurrence, because Congress had still not fixed the problems, and Wall Street had reverted to business as usual. (Despite the enactment of Dodd-Frank, and even because of it, that statement would still hold true four years later.)
I recently encountered Wessel at a conference and referring to an interview he conducted with former Rep. Barney Frank, D-Mass., and former Treasury Secretary Henry Paulson asked whether it occurred to Wessel, when Paulson was appointed Treasury Secretary in 2006, that Goldman Sachs was in trouble and that a spate of big bank bailouts was in store. Wessel replied that he did not entertain this thought in 2006, and he does not believe it now.
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