Paul Volcker was the last great Chairman of the Federal Reserve. He was presented with a terrible situation -- stagflation, or weak growth and high inflation. He could only tackle one problem. He chose inflation. To combat the problem he increased interest rates to levels that caused a recession. In fact -- there were two recessions. However, 25 years later, we still have low inflation largely thanks to Volckers efforts. He deserves far more accolades than he receives.
In today's WSJ he offers something that is dearly lacking right now: hope that this situation will end. What has been dearly lacking from anybody (and I mean anybody in any party in any position anywhere) is leadership. Bush is a lame duck watching is legacy (what little is left) circle the bowl. Congress has lacked any dynamic leaders who inspire calm. Paulson attempted one of the largest power grabs in political economic history several weeks ago lowering his public perception. In short, there haven't been many adults anywhere to be found.
However, Volcker is an adult. His editorial is clear and decisive.
First of all, there is now clear recognition that the problem is international, and international coordination and cooperation is both necessary and underway. The days of finger pointing and schadenfreude are over. The concerted reduction in central bank interest rates is one concrete manifestation of that fact.
While there is concern on my part that Bush will do everything he can to prevent international coordination from occurring, the bottom line is circumstances may overpower him. Simply put -- he really doesn't have much choice right now.
In the U.S., with higher limits of deposit insurance in place, the FDIC has demonstrated its ability to protect depositors, to arrange mergers, and to provide capital for troubled banks. Most other countries now have a comparable capacity.
Recent U.S. legislation has provided authority for large-scale direct intervention by the Treasury in the mortgage and other troubled markets. Along with increased purchases by Fannie Mae and Freddie Mac, now under government control, means of restoring needed liquidity are at hand.
Other key sectors of financial markets are now protected or supported by either the Treasury or Federal Reserve, specifically by temporary insurance of money-market funds and by direct purchase of commercial paper.
The FDIC has been working overtime over the last year. Behind the scenes they have helped to arrange important mergers that kept deposit access seamless while preventing more hits to their capital. They deserve far more credit then they are getting.
There is now authority for the Treasury to take unprecedented moves in the markets. While some may not like this -- those arguing "socialism" etc -- they should simply be ignored. The bottom line is we are far past the point of ideology. We need solutions. What has been proposed so far is clearly insufficient to solve the task. We need far more direct intervention and participation.
In addition, there are other regulatory pieces in place. SIPC will help to prevent losses at brokerage firms should there be any problems. There is talk of insuring all bank deposits and debts. In other words -- we're moving in the right direction.
But we need leadership:
None of that is easy. Some of it poses risks for the taxpayer. All of it is decidedly unattractive in the sense of large official intervention in what should be private markets able to stand on their own feet. Unattractive or not in normal circumstances, the point is the needed tools to restore and maintain functioning markets are there. Now is the time to use them. To that end, the immediate and critical need is determined, forceful and persistent leadership -- extending across administrations and Congresses. Both the public and private sectors must be involved