My lunch with Paul Volcker
The former Fed chairman on circumstances of yesterday, today and tomorrow
We have had 100 years to consider the historical legacy of the Titanic. One of the least understood lessons of the Titanic’s sinking in April 1912 could fall under the category of “unintended consequences,” including the lesson that too much safety can be just as dangerous as a hidden iceberg.
Writing in the Financial Times last year, former Federal Reserve governor Randall Kroszner reported that the wave of post-Titanic regulations were designed to insure that passenger ships would have enough lifeboats. What was ignored in the rush to safety was that some ships were not designed to handle the extra weight above decks. One passenger ship, the Eastland, sank in 1915 in the Chicago River with 841 souls lost.
“The additional weight of the lifeboats and rafts may have been only one factor contributing to this calamity, but it illustrates how powerful unintended consequences can be of even the most sensible-seeming regulatory reforms,” Kroszner wrote.
Recently, I had the pleasure of an extended lunch with one of my all-time heroes, Paul Volcker, former Fed chairman (1979-1987) and the first chair of the Economic Recovery Advisory Board (2009-2011). I was curious to learn and discuss his opinion on many economic and political topics, but in particular how the Volcker Rule has played out as part of the larger Dodd-Frank financial reform legislation.
Simply put, the Volcker Rule was intended to curb large bank and institutional speculative investments with client and public (FDIC) money – in essence going to the casino to gamble with other people’s money. I had met Mr. Volcker twice before, but this was certainly a more intimate, dynamic and insightful discussion.
Mr. Volcker understands the unintended consequences of Dodd-Frank, with increased regulatory burdens on smaller banks. He had initially proposed a far simpler and more targeted set of rules – and he sympathized with those of us on the front lines serving clients.
“You have a more difficult job than I did” he half-joked.
Our lunch group spent most of the time discussing a more troubling long-term trend that could have significant consequences for our nation’s economic and political health – namely the decline of public service as a career. This is due to hyper-partisan politics and the power of big-money lobbies.
Volcker, at age 88, retains a sharp mind and strong wit and remains pragmatic and thoughtful. He represents an era in which bipartisan problem-solving and a dedication to public service made our nation better. He remembers when only a few buildings were occupied by lobbyists when he first arrived in Washington in the early 1960s.
Volcker was appointed chair of the Federal Reserve Bank by President Carter and reappointed by President Reagan. His bipartisan appointments displayed a desire to work with political leaders on both sides of the aisle to deal with the toxic economic contagion of “stagflation” in the late 1970s and early 1980s. He knew that the Fed’s monetary policy could be a “blunt instrument,” but ineffective in the long run if not joined with fiscal policies from Congress and the president.
Volcker said that the late U.S. Sen. Warren Rudman of New Hampshire represented “a gold standard in public service” for his devotion to transparent and wiser government budgeting with the Gramm-Rudman-Hollings Deficit Reduction Act of 1985. He suggested that the difference today is that the Fed has driven the economy on monetary policy alone, while on the fiscal side a proper political response has gone sorely wanting.
The Fed has done its job and now the politicians should do theirs.
Volcker hasn’t rested on his many laurels as he continues to talk openly about the decline of public service. He contributes his name to organizations like The Center for Public Integrity and founded the nonprofit Volcker Alliance in 2013 to promote stronger public policies and to help rebuild trust in our government.
Just as Volcker was unsparing in his criticism of “big money” in the financial meltdown in 2008, it is fair to say that he’s no less dogged on the subject of public finance. He considers pension liabilities one of the biggest threats to states and our nation in controlling expenses and income. These budget risks are sinking, metaphorically, like the Eastland. We might all be victims of unintended consequences.
I appreciate the picture on my mentor wall signed by Mr. Volcker, on which he inscribed “Thanks for your advice.” The greatest are often the most gracious.
Tom Sedoric, a nationally recognized wealth manager, is managing director-investments at The Sedoric Group of Wells Fargo Advisors in Portsmouth, 603-430-8000 and thesedoricgroup.com.