Volcker Rules!

During many of my presentations, I ask the audience “who got a home mortgage in the early 1980s?” Several hands invariably go up and the interest rates I have heard range from 10% to 17%. I ask that question both out of a morbid sense of curiosity and for the pleasure of watching smoke come out of the ears of my younger audience members who have never heard of mortgage interest rates that high. The reason why interest rates have plummeted since then is because of my hero, former Federal Reserve Chairman Paul Volcker, who recently published his memoir, “Keeping At It: The Quest for Sound Money and Good Government.”

Mr. Volcker is perhaps best known for the Volcker Rule, which, in an effort to prevent another global financial crisis, put restrictions on proprietary trading by “too-big-too-fail” financial institutions. But that was just one of many accomplishments over Mr. Volcker’s 65-year career in public and private finance, during which he served as a trusted advisor to every president since Lyndon Johnson. From 1979 to 1987, he served as Fed chairman when there was a real risk that the U.S. economy (and by extension the global economy) might go broke absent decisive intervention by the Fed. While Ronald Regan and Margaret Thatcher get the most credit in history books, Paul Volcker made their free-market reforms possible.

He was also tough. Though he often signaled to presidents the likely actions of the Fed, he also fought hard to fend off political meddling. In his new book, Mr. Volcker recounts the time when he ignored an order by James Baker, President Reagan’s chief of staff, not to raise interest rates before the 1984 presidential election. In many ways, he serves as a model for current Fed Chairman Jerome Powell in ignoring political interference and maintaining the Fed’s independence.

As the title of his memoir suggests, Mr. Volcker at 90 has been “keeping at it” for a very long time. His fingerprints are on most of the major economic and financial reforms of the past 50 years. Despite his unmatched accomplishments, Mr. Volcker has one more mountain to climb in the form of restoring trust in government, which he sees as not only evaporating but putting at risk the future of our country. As the son of a New Jersey town administrator during a much simpler time in politics, Mr. Volcker saw and admired what he considers good pubic administration. While all the good-intentioned people in the world could likely come together on several positive policy prescriptions, without good fundamental government management it will all be for naught.

“My plea is very simple,” he writes. “At the end of the day, good policy is dependent on good management.” Even the Fed, which may be the greatest independent regulatory body in the U.S., can’t effect good policy on independence alone. “It demands emphasis on price stability and prudent oversight of the financial system.” He formed his non-partisan Volcker Alliance in 2013 with exactly this mission: good management of government.

In addition to poor government management policies, Mr. Volcker worries about how precisely the Fed attempts to predict the behavior of market participants to its actions. “I do know some practical facts. No price index can capture, down to a tenth or a quarter of a percent, the real change in consumer prices.” Despite being as dyed in the wool an economist as you can get, Mr. Volcker seems to be a later adherent to the softer “behavioral economics” camp of which I’m a big advocate.

While the Volcker Rule has been the subject of much derision from the financial services industry, I suspect Mr. Volcker considers this a compliment. He has a clear-eyed view of what a good Fed chairman should do: “take away the punch bowl just as the party gets going.”

Mr. Volcker was always a bit of a rebel. There is a famous image of him testifying before Congress while smoking a large cigar in front of a “No Smoking” sign. Over the course of his career, he instituted many unpopular regulations, including removing the U.S. from the gold standard in 1971, insisting on stronger capital ratios for banks and other risk-weighting tools for lending, and what I consider to be his most significant accomplishment: his 1979 program of materially raising interest rates to intentionally cause a recession. He shouldn’t have denied this intent in his book, because it is precisely this type of courage and independence that is needed by many public officials. He instituted the Volcker Rule after the figurative bankers’ “party” burned down the house. He wouldn’t let them have the ability (at least through proprietary trading) to spike the punch bowl again. Nevertheless, he notes, “we have learned time and again that years of financial stability and economic growth tend to involve easing of regulations and supervisory discipline. We see that at work as I write in 2018.”

Mr. Volcker laments that “we’ve come to question all of the hallmarks of our great society: our public educational system and respected universities, the once ‘reliable’ free press, even scientific expertise.” What’s needed to rebuild public trust in government “requires critically needed reforms in our political process and leaders who can restore and preserve a consensus upon which our great democracy can depend.” He says he has no desire to ever again visit Washington, D.C., which “not so long ago was a middle-class, midsized city dominated by an ethic of public service [and] today simply oozes with wealth and entitlement.”

Douglas MacArthur, in his farewell address at West Point, famously said that great generals never die, they just fade away. Mr. Volcker, as perhaps the greatest living public financier, has never faded away and has grown more vocal in his convictions and proscriptions to make the American political and financial system stronger. The world should forever be in debt for his leadership and courage.

By Spencer Levy, Chairman of Americas Research and Senior Economic Advisor.