Former Fed Chair Volcker Critical Of U.S. Central Bank
Former Federal Reserve Chairman Paul Volcker was recently interviewed by the New York Times Magazine for a story it will be running Sunday. Reuters was able to obtain the text in advance of the publication, and reported Wednesday that Volcker thinks the Federal Reserve is to blame for asset markets being blown into bubbles, and says that current Fed chief Ben Bernanke is in a tough spot. The Times quoted Volcker as saying:
Too many bubbles have been going on for too long… The Fed is not really in control of the situation.
Reuters interpreted this statement as “seemingly clear criticism” by Volcker of both Bernanke and his predecessor, Alan Greenspan. Critics of the Fed blame the ultra-low interest rate policies of the final Greenspan years for fueling a U.S. housing bubble. Greenspan has also been criticized for being very aggressive in cutting interest rates when growth was threatened, but slower to raise them when it picked up and the risks flipped toward higher inflation, according to the news agency. Volcker, on the other hand, is credited with ending the rampant inflation of the 1970s by aggressively tightening monetary policy (for which he was greatly criticized in some quarters at the time).
Back on June 20 I talked about “Tall Paul,” who was Federal Reserve Chairman from 1979 to 1987. In that post, I mentioned that at a dinner hosted by the Concord Coalition in New York in November 2006, Volcker predicted that the United States’ dependence on foreign money raises the risk of a crisis in the dollar as soon as the next two and a half years. He said:
It’s incredible people have gone on so long holding dollars… At some point, you will get a situation where people have had enough.
On April 10, 2005, Volcker talked about the U.S. economy in the Washington Post, and warned readers:
Yet, under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks— call them what you will… What really concerns me is that there seems to be so little willingness or capacity to do much about it…
He added:
As a nation we are consuming and investing about 6 percent more than we are producing. The difficulty is that this seemingly comfortable pattern can’t go on indefinitely… I don’t know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars.
Finally, Volcker speculated:
Sphere: Related ContentI don’t know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change.
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