I had been selling real estate for two years when Paul Volcker was named Fed Chairman by Jimmy Carter in 1979. Our market was appreciating at 10% per year. Sellers were having fun, and buyers were swallowing hard - but were buying. We had yet to acquire our first investment property. Good thing, that. Hired on to crush inflation, and even the expectation of inflation, Volcker succeeded in the task by forcing interest rates into the stratosphere. When borrowed money comes with a 21.5% interest rate, people tend not to borrow money. A significant recession followed and many people got hurt financially, but, as a result of Volcker's toughness, inflation, and the spectre of inflation was gone. People who believe that interest rates might go back to 21.5% tend to be careful about how much they pay. The discipline instilled by Volcker's decisions lasted about twenty years, until the mass hysteria of the housing bubble made folks forget that prices do not always go up. Volcker was Fed Chair until 1987, after which he sort of fell off my radar screen. In 2008, he popped up again - as an early supporter of Barack Obama. So much for the back story. I've been reading Ron Suskind's very interesting book, Confidence Men: Wall Street, Washington, and the Education of a President. About halfway through the book, Volcker takes center stage. A few excerpts:
"'How do you deleverage an entire economy?' Paul Volcker asked, in sort of a joke, 'Verrrrrry carefully.'"
"Now his focus was on the geological shifts of the debate: 'the problem is we're replacing private debt with public debt.' When people start lending again, and eventually they will, he said, the private debt is likely to be replenished. Then the total debt will be even higher. How do you stop this"
'Well, right now, when you have your chance, and their breasts are bared, you need to put a spear through the heart of all these guys on Wall Street that for years have been mostly debt merchants.'"
"These banks, Volcker said, not only were susceptible to 'moral hazard,' but worse, to keep up their earnings in a soft lending market, they'd need to rely, even more, on being R & D labs for 'financial innovation.' On that score Volcker was blunt: it was mostly chicanery draped in the alluring obscurities of marketing and complex math. 'The last financial innovation by the banks that really created productivity and efficiency was the ATM."
"This effort to limit deductions on high-end salaries prompted companies to put more compensation in stock options....right at the start of the strongest decade for rising stocks in a century. Compensation, already rising fast, accelerated its ascent in an environment of weak unions and shareholder rights, and lax ethical boundaries for directors.
'Once this sort of thing starts, it takes some real toughness to stop it,' Volcker said. 'But someone should have. Because having people paid tens of millions for activities of no social or really economic value - or, as the crash shows, negative value - just tears a society apart, at all levels, top to bottom. Well, maybe not the top.'"
"Well, I said, 'The trouble with the United States recently is we spent several decades not producing many civil engineers and producing a huge number of financial engineers. And the result is shitty bridges and a shitty financial system!'
Volcker roared with laughter, until his eyes watered, and he took off his glasses to wipe them. Of course, he was talking about something very serious, about choices people make in their lives, as well as those made by a nation.
'It always used to bother me - not so much anymore, but for a long time - how I spent all my life in government, doing things that were so intangible. What's there to show for it, what's left behind?' he said in a soft grumble. 'And I just thought, imagine saying, 'There's a a goddamn bridge I built. Or I designed that building, or I shaped that beautiful landscape.'
'I always wanted to build something in my life. All I did was stop inflation.'"
Suskind's book comes highly recommended.
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