[Marxism] Top Obama aide: Americans have been living beyond their means

Louis Proyect lnp3 at panix.com
Mon Dec 8 07:16:36 MST 2008


http://www.latimes.com/news/nationworld/washingtondc/la-na-volcker8-2008dec08,0,108304.story
 From the Los Angeles Times

Paul Volcker is back, and he warns of tough times ahead
Volcker has been chosen by President-elect Barack Obama as a special 
economic advisor. His 'no pain, no gain' fiscal strategy worked in the 
'80s, and there's no sign he's softened that philosophy.
By Ralph Vartabedian

December 8, 2008

A generation ago, Paul A. Volcker was a household name, the Federal 
Reserve chief who waged a hard-nosed but successful battle against 
virulent inflation that clouded the nation's economic future. He did it 
by engineering a horrific recession, clamping on the financial brakes 
and sending the economy into a tailspin in 1981.

Nobody knew whether his strategy would work. It certainly caused 
widespread pain. But by 1986, double-digit inflation was gone and price 
increases had dropped to about 2% annually, setting the stage for the 
next two decades of economic stability.

Now Volcker is back, tapped by Barack Obama as a special economic 
advisor. And if the president-elect follows his advice on the current 
economic crisis, there could be pain again and no doubt many protests -- 
but also the possibility of long-term benefits.

In speeches, interviews, public policy reports and congressional 
testimony, Volcker, 81, has laid out a fairly clear outline of what he 
thinks is wrong with the present-day financial system and the 
government's management of the economy.

His concerns go to the very core of how America lives and how Wall 
Street operates. A child of the Great Depression and a man of legendary 
personal thrift, Volcker thinks Americans have been living above their 
means for too long.

"It is the United States as a whole that became addicted to spending and 
consuming beyond its capacity to produce," Volcker lectured the Economic 
Club of New York in April. "It all seemed so comfortable."

Bringing consumption back in line with income would not only crimp 
individuals and families, but also require major readjustments in the 
global economy, which has relied on the U.S. as consumer of last resort.

More oversight

Volcker has become a skeptic of modern Wall Street, worried that the 
nation's entire financial system has evolved to a point that the 
government no longer has effective control over all of its important 
components. And the financial industry has become beholden to complex 
financial engineering that clouds the picture.

"The market was being run by mathematicians who didn't know financial 
markets," he said this year after the crisis struck.

Clearly, he wants tough new regulations on securities markets, including 
oversight of hedge funds, in order to avoid the need for a bailout 
effort by the Fed ever again. It seems likely that he will advise Obama 
that the growth of U.S. consumption -- everything from government 
spending to household outlays -- should not be financed by selling ever 
larger amounts of debt to foreign interests.

But he warns people not to expect an easy ride. "It's going to be a 
tough period," Volcker said in a speech at the Urban Land Institute in 
late October. "But when we dealt with inflation, it laid the groundwork 
for 20 years of growth. I'd like to see that happen this time."

In pressing his case, economists and policy experts say, Volcker will 
have a level of experience, credibility and integrity that should carry 
great weight in the new administration.

"It is less about his ideas but more about his stature, wisdom and 
integrity," said Princeton University economist Alan Blinder. "There is 
not another person on the planet who can match that combination."

"Paul has a very quiet but forceful way of expressing his views," said 
Princeton University economist Peter B. Kenen, who began working with 
Volcker during the Kennedy administration. "He can say, 'I look back on 
50 years of public service and I can count the times that Idea A worked 
and Idea B didn't work.' "

Volcker will not occupy a position in the Obama administration that 
gives him any direct authority, a big change from the days when he ran 
the Fed with an iron grip. While the Treasury, Federal Reserve, 
Securities and Exchange Commission and other agencies all have turf to 
protect, Volcker has no turf.

He also will have to work with some outsized egos and giant intellects 
on Obama's economic team: Lawrence H. Summers, chairman-designate of the 
National Economic Council; Timothy F. Geithner, nominated to be Treasury 
secretary; and Christina Romer, chosen to lead the Council of Economic 
Advisors.

The group is generally not of one mind. Major differences exist in how 
they view regulation, monetary control and fiscal policy. Summers, for 
example, was among the Clinton administration officials who helped relax 
federal regulation on Wall Street, recalled David R. Henderson, a 
conservative economist at the Hoover Institution. Romer has questioned 
how well fiscal policy works at all, a central tenant of Democratic 
economic thinking.

Further complicating the picture, Volcker has an entirely new and 
untested organization to head.

The day before Thanksgiving, Obama named him chairman of the Economic 
Recovery Advisory Board, an entity seemingly created to bring Volcker, 
his experience, knowledge and credibility into the administration. The 
board is supposed to provide "fresh thinking and bold new ideas from the 
leading minds across America," Obama said.

Half-century career

Volcker is the chairman and Austan Goolsbee, a noted University of 
Chicago economist and longtime Obama advisor on economics, will be staff 
director.

But those who know Volcker think his influence will be clearly felt, 
regardless of his portfolio.

His career has spanned half a century. He began working at the New York 
Fed in the 1950s, and five years later went to Chase Manhattan Bank, 
where he became a lifelong confidant of the Rockefeller family. By the 
early 1960s, President Kennedy brought Volcker into the Treasury 
Department in his first government job at the policy-making level.

He later held top appointments under Presidents Johnson, Nixon, Carter 
and Reagan.

In recent years, he has led investigations into how Swiss bankers 
handled the accounts of Holocaust victims, the United Nations' troubled 
food-for-oil program and the accounting scandal surrounding the collapse 
of Enron Corp. He also chairs the Group of Thirty, a who's who of world 
economists that examines complex public policy issues. It met over the 
weekend to discuss an upcoming report on the overhaul of financial 
regulations.

Volcker grew up during the Depression, raised by a father who taught him 
one lesson above everything else: Integrity is a person's greatest 
asset, said Volcker's sister, Virginia Streitfeld. She calls Volcker, 
who stands 6-foot-7, her "little brother."

He is known for practicing what he preaches about the nation living 
within its means. He travels with one business suit and lives in the 
same Manhattan apartment that he bought decades ago.

When he was Fed chief, he lived in a modest Maryland apartment and did 
his laundry on Saturdays at his daughter's house nearby, recalled Marina 
v.N.Whitman, a University of Michigan economist who has known Volcker 
for decades.

"Paul is one of the most frugal guys on Earth," Whitman said. "The 
advice he gives and the way he views the world are entirely consistent 
with his personal ethics and lifestyle."

He is outraged by executive compensation packages, seeing them as part 
of a larger breakdown on Wall Street.

"Paul can't imagine anybody wanting or needing that much compensation 
for consumption purposes," said Whitman, a member of the Group of 
Thirty. "It probably offends his sense of right and proper."

As for the bigger picture, Volcker feels that tremendous changes in the 
financial system have eclipsed government regulators, allowing excesses 
to go unchecked and subjecting the economy to ever greater shocks. Over 
time, the U.S. has moved from a system of highly regulated banks that 
funded the economy to a system of highly engineered financial markets 
that operated outside the scope of regulators.

Complex financial instruments were created that attempted to slice and 
dice the risks, handing them to investors who would be most willing to 
accept them.

But the mathematical models that were supposed to measure those risks 
actually hid the true risk from the marketplace, Volcker has said: For 
one thing, no mathematical model can accurately predict human hysteria 
in a financial panic. "Simply stated, the bright new financial system . 
. . failed the test of the marketplace," Volcker said this year.

'Old-fashioned'

"Paul has long been skeptical about financial engineering, which is 
another way of saying concocting schemes on Wall Street that nobody can 
understand," economist Blinder said. "He has some old-fashioned ideas 
that banks should apply some common sense to loaning money -- like 
making sure borrowers can repay."

The result of such problems was that the Federal Reserve, the linchpin 
of U.S. economic power, was forced to "take actions to the very edge of 
its lawful and implied powers" that violated "time-honored central bank 
practices," Volcker told the Economic Club of New York.

"The only reason I sleep at night," said a longtime friend and business 
partner of Volcker's, speaking on background, "is that Paul Volcker will 
have the president's ear."

Vartabedian is a Times staff writer.

ralph.vartabedian

@latimes.com




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