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Volcker taught the world how central banks should reconcile their multiple, sometimes conflicting mandates to effectively manage monetary policy. When he becam

Volcker taught the world how central banks should reconcile their multiple, sometimes conflicting mandates to effectively manage monetary policy. When he became chairman of the US Federal Reserve in 1980, the US was suffering from stagflation, or stagnation + inflation, which economists previously believed was impossible to have at the same time. The fear was that solving stagnation by lowering interest rates would drive higher inflation, possibly hyperinflation, but conversely that raising interest rates to solve inflation would exacerbate the stagnation, possibly into a depression. Volcker showed that focusing on and killing inflation by raising interest rates, even to extreme levels (briefly up to ~20%), you end both inflation and stagnation. For one reason, low, steady, predictable inflation, better enables businesses to plan, hire and invest. And that has been central bank policy ever since (though they arguably mistakenly deviated from it under the latter part of Greenspan’s tenure). As Bernanke said, “He personified the idea of doing something politically unpopular but economically necessary.” It’s rare to have such an impact on one’s field, especially under such adverse circumstances.

peisistratos 7y ago
> Volcker showed that focusing on and killing inflation by raising interest rates, even to extreme levels (briefly up to ~20%), you end both inflation and stagnation. Another thing jacked up was the unemployment rate - to 11%. Bad for the people doing the work and creating the wealth, good for the heirs receiving dividends from the expropriated surplus time if those who work. Jacking the interest rate up to ~20% so that unemployment goes to 11% is not a stroke of genius, it's just something no one was politically capable of doing beforehand.
lame-robot-hoax 7y ago
A history lesson in why it’s incredibly important for the Fed to stay independent and not bow to political pressures from the president.
Ididntdothis 7y ago
With stuff like this I always wonder if Volcker had such a great insight or if he was just lucky to have things come together at the right time. Greenspan was also considered a genius until he wasn't.
- everybodyknows 7y ago
  >was just lucky to have things come together at the right time. Yes. In one interview Volcker recalls having told Carter "Yes, I can end inflation. But if I do, you won't get re-elected". Carter: "Do it anyway." (Can't find the reference now, anyone know it?) From a few years back: https://fortune.com/2015/10/31/paul-volcker-jimmy-carter-donald-trump/ https://fortune.com/2015/10/31/paul-volcker-jimmy-carter-don... Lots of people knew what had to be done, but Jimmy Carter was the rare sort of electee who would act in the country's best interests, even to the ruin of his own career.
  - ls612 7y ago
    And credit to Reagan for following through with it, and not just dismissing it as his predecessor's failed policy. Even through the 1982 recession that Volcker caused, which finally brought inflation down below 10% and almost cost him re-election.
    - mattrp 7y ago
      I wouldn’t necessarily say Reagan went along with volker. For starters, volker advised that if Americans wanted to fix the economy they needed to accept a lower standard of living: https://www.nytimes.com/1979/10/18/archives/volcker-asserts-us-must-trim-living-standard-warns-of-inflation.html?searchResultPosition=1 https://www.nytimes.com/1979/10/18/archives/volcker-asserts-... That’s actually the opposite of what Reagan was saying at the time.
  - mattrp 7y ago
    The carter quote feels a bit like a myth but it was known that his advisors did tell him the risk with volker would be that he could very well cost him the election. However carter was influenced by the northeast elite on fed policy and went along with their recommendation to go with their man. Maybe no one remembers but it was Paul Volker, himself, who raised interest rates, twice, to high double digits in order to “slow” the economy. It was akin to fixing the economy by strangling it. The reason the economy recovered was Reagan. For the first time in nearly two decades people believed in the future.
solving_that 7y ago
1980 ? Stagflation.... um Dear Sky Marshal, does that correlate with the Crime- and Birthrate in the 80s ? Across the US and otherwhere ? And btw, In Germany there are now Pensions to pay (each Year) for people, who worked for the State (BRD-Beamten Pensionen) in a Volume of 757,000,000,000,-Euro -so, may i ironicaly reframe a raising 'interest' to another real scenario ?
aidenn0 7y ago
My parents bought the house in which I grew up in 1985. They had a double-digit interest rate on that purchase at more than 3 times the current going rate and that was with paying points too. I do wonder what will happen if mortgage rates return to even their pre-Volcker level, much less the 1980s levels. Household incomes versus PITI on a 30 year mortgage places a ceiling on housing prices, so if interest rates go up, then the prices in currently hard-to-afford areas will have to go down.
- klodolph 7y ago
  You can already see that housing prices are inversely correlated with interest rates. Yes, this will reduce the sale price of houses in hard-to-afford areas, but the change on how affordable these houses are will not change as much as you might think. E.g. $100k, 4%, 30y -> $477/mo, but $65k, 8%, 30y -> $477/mo. This isn’t the full picture, obviously, but in this hypothetical example, both scenarios are more or less equally affordable. (Again, this example is just illustrative. I know people who bought in the 1980s and then refinanced in the 1990s, which ended up being a pretty sweet deal.)
  - runako 7y ago
    Yes! Also, long-term owners who bought while rates were high stood to benefit greatly as interest rates came down and home prices rose accordingly. (In your example, your $65k @ 8% house becomes a $100k house where you've refinanced down to 4%.)
  - api 7y ago
    The down payment is a function of the sale price, and that makes housing completely unthinkable to a lot of people in high price areas. They could afford the payment. Sometimes the payment would be lower than rent. Going under 20% down results in poor loan terms and extra expenses like mortgage insurance that ruin the economics. So high sticker prices on homes really do make them unaffordable to first time buyers who don't have family help or a very high income.
    - autokad 7y ago
matthewdgreen 7y ago
The alternative story I’ve heard is that “stagflation” happened to coincide with a massive surge in oil prices due to OPEC — which are an input to just about every product we use, hence increasing prices — and Volcker’s deflationary recession just happened to coincide with OPEC falling apart. But this alternative explanation seems so obviously different from the lesson in your post that it can’t be the full story, so I assume there’s some nuance.
- mattrp 7y ago
  The nuance is that fed chairs don’t criticize each other and with rare exception all come from the same elite club - much like Supreme Court justices. I think your assessment is more likely the actual reasons for the cause / end of simultaneous stagflation/inflation.
- m0zg 7y ago
  Same reason why the USSR collapsed, BTW. Oil prices collapsed by mid 80s, and the USSR couldn't survive for very long without those export revenues. Gorbachev took over just as oil prices have hit the bottom. And if you look at the same graphs, you will see that Putin's economic recovery was largely sustained by the upward trend in hydrocarbon prices. To this day Russia has not even begun to diversify its economy.
  - rm_-rf_slash 7y ago
    A cynical counterargument would be to point to the taxpaying cybercriminals to show evidence towards Russia’s burgeoning tech sector. https://slate.com/technology/2018/02/why-the-russian-government-turns-a-blind-eye-to-cybercriminals.html https://slate.com/technology/2018/02/why-the-russian-governm...
    - m0zg 7y ago
      I'm pretty sure criminals pay no taxes on their ill gotten gains in Russia. Heck, most "legal" businessmen there are forced by the extreme oil-oriented taxation regime to maintain "gray" books and only pay taxes on revenues that aren't under the table. Normal businesses can't really survive the kinds of taxes levied on oil/gas monopolies. It is far easier to pay off your local friendly government tax agent who would then miraculously buy a Maybach and a villa in Switzerland on $20K/yr government salary.

peisistratos 7y ago

> Volcker showed that focusing on and killing inflation by raising interest rates, even to extreme levels (briefly up to ~20%), you end both inflation and stagnation. Another thing jacked up was the unemployment rate - to 11%. Bad for the people doing the work and creating the wealth, good for the heirs receiving dividends from the expropriated surplus time if those who work. Jacking the interest rate up to ~20% so that unemployment goes to 11% is not a stroke of genius, it's just something no one was politically capable of doing beforehand.

lame-robot-hoax 7y ago

A history lesson in why it’s incredibly important for the Fed to stay independent and not bow to political pressures from the president.

Ididntdothis 7y ago

With stuff like this I always wonder if Volcker had such a great insight or if he was just lucky to have things come together at the right time. Greenspan was also considered a genius until he wasn't.

everybodyknows 7y ago
>was just lucky to have things come together at the right time. Yes. In one interview Volcker recalls having told Carter "Yes, I can end inflation. But if I do, you won't get re-elected". Carter: "Do it anyway." (Can't find the reference now, anyone know it?) From a few years back: https://fortune.com/2015/10/31/paul-volcker-jimmy-carter-donald-trump/ https://fortune.com/2015/10/31/paul-volcker-jimmy-carter-don... Lots of people knew what had to be done, but Jimmy Carter was the rare sort of electee who would act in the country's best interests, even to the ruin of his own career.
- ls612 7y ago
  And credit to Reagan for following through with it, and not just dismissing it as his predecessor's failed policy. Even through the 1982 recession that Volcker caused, which finally brought inflation down below 10% and almost cost him re-election.
  - mattrp 7y ago
    I wouldn’t necessarily say Reagan went along with volker. For starters, volker advised that if Americans wanted to fix the economy they needed to accept a lower standard of living: https://www.nytimes.com/1979/10/18/archives/volcker-asserts-us-must-trim-living-standard-warns-of-inflation.html?searchResultPosition=1 https://www.nytimes.com/1979/10/18/archives/volcker-asserts-... That’s actually the opposite of what Reagan was saying at the time.
- mattrp 7y ago
  The carter quote feels a bit like a myth but it was known that his advisors did tell him the risk with volker would be that he could very well cost him the election. However carter was influenced by the northeast elite on fed policy and went along with their recommendation to go with their man. Maybe no one remembers but it was Paul Volker, himself, who raised interest rates, twice, to high double digits in order to “slow” the economy. It was akin to fixing the economy by strangling it. The reason the economy recovered was Reagan. For the first time in nearly two decades people believed in the future.

solving_that 7y ago

1980 ? Stagflation.... um Dear Sky Marshal, does that correlate with the Crime- and Birthrate in the 80s ? Across the US and otherwhere ? And btw, In Germany there are now Pensions to pay (each Year) for people, who worked for the State (BRD-Beamten Pensionen) in a Volume of 757,000,000,000,-Euro -so, may i ironicaly reframe a raising 'interest' to another real scenario ?

aidenn0 7y ago

My parents bought the house in which I grew up in 1985. They had a double-digit interest rate on that purchase at more than 3 times the current going rate and that was with paying points too. I do wonder what will happen if mortgage rates return to even their pre-Volcker level, much less the 1980s levels. Household incomes versus PITI on a 30 year mortgage places a ceiling on housing prices, so if interest rates go up, then the prices in currently hard-to-afford areas will have to go down.

klodolph 7y ago
You can already see that housing prices are inversely correlated with interest rates. Yes, this will reduce the sale price of houses in hard-to-afford areas, but the change on how affordable these houses are will not change as much as you might think. E.g. $100k, 4%, 30y -> $477/mo, but $65k, 8%, 30y -> $477/mo. This isn’t the full picture, obviously, but in this hypothetical example, both scenarios are more or less equally affordable. (Again, this example is just illustrative. I know people who bought in the 1980s and then refinanced in the 1990s, which ended up being a pretty sweet deal.)
- runako 7y ago
  Yes! Also, long-term owners who bought while rates were high stood to benefit greatly as interest rates came down and home prices rose accordingly. (In your example, your $65k @ 8% house becomes a $100k house where you've refinanced down to 4%.)
- api 7y ago
  The down payment is a function of the sale price, and that makes housing completely unthinkable to a lot of people in high price areas. They could afford the payment. Sometimes the payment would be lower than rent. Going under 20% down results in poor loan terms and extra expenses like mortgage insurance that ruin the economics. So high sticker prices on homes really do make them unaffordable to first time buyers who don't have family help or a very high income.
  - autokad 7y ago

matthewdgreen 7y ago

The alternative story I’ve heard is that “stagflation” happened to coincide with a massive surge in oil prices due to OPEC — which are an input to just about every product we use, hence increasing prices — and Volcker’s deflationary recession just happened to coincide with OPEC falling apart. But this alternative explanation seems so obviously different from the lesson in your post that it can’t be the full story, so I assume there’s some nuance.

mattrp 7y ago
The nuance is that fed chairs don’t criticize each other and with rare exception all come from the same elite club - much like Supreme Court justices. I think your assessment is more likely the actual reasons for the cause / end of simultaneous stagflation/inflation.
m0zg 7y ago
Same reason why the USSR collapsed, BTW. Oil prices collapsed by mid 80s, and the USSR couldn't survive for very long without those export revenues. Gorbachev took over just as oil prices have hit the bottom. And if you look at the same graphs, you will see that Putin's economic recovery was largely sustained by the upward trend in hydrocarbon prices. To this day Russia has not even begun to diversify its economy.
- rm_-rf_slash 7y ago
  A cynical counterargument would be to point to the taxpaying cybercriminals to show evidence towards Russia’s burgeoning tech sector. https://slate.com/technology/2018/02/why-the-russian-government-turns-a-blind-eye-to-cybercriminals.html https://slate.com/technology/2018/02/why-the-russian-governm...
  - m0zg 7y ago
    I'm pretty sure criminals pay no taxes on their ill gotten gains in Russia. Heck, most "legal" businessmen there are forced by the extreme oil-oriented taxation regime to maintain "gray" books and only pay taxes on revenues that aren't under the table. Normal businesses can't really survive the kinds of taxes levied on oil/gas monopolies. It is far easier to pay off your local friendly government tax agent who would then miraculously buy a Maybach and a villa in Switzerland on $20K/yr government salary.