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Speaker 1: Ye, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane.

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Speaker 1: Daily we bring you insight from the best in economics, finance, investment,

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Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,

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Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. Bloomberg

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Speaker 1: Surveillance from London and from New York. Paul Sweeney in

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Speaker 1: New York this morning. It has been a dreary and

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Speaker 1: rainy day in New York, and now the sad news

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Speaker 1: of Paul Woker has died here. I can't convey, folks,

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Speaker 1: the courage, the intellectual courage of Paul Worker in the

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Speaker 1: crucible of the late nineteen seventies and into the early

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Speaker 1: nineteen eighties. There is no precedent in our financial history

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Speaker 1: with an important report or Bob Moon is a friend.

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Speaker 1: When Saturday Night Live made fun of Jimmy Carter's inflation

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Speaker 1: headaches in the late nineteen seventies, it was rapidly becoming

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Speaker 1: no laughing matter. In the two thousand, trans continued, the

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Speaker 1: average blue collar annual wage in this country will be

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Speaker 1: five hundred and sixty eight thousand dollars. Good evening prices

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Speaker 1: in the United States during the first three months of

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Speaker 1: nineteen seventy nine went up at an annual rate of

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Speaker 1: That was the year Paul Woker became Chairman of the

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Speaker 1: Federal Reserve. He would go on to be credited with

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Speaker 1: breaking the back of inflation with some very tough medicine.

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Speaker 1: Under the Carter and Reagan administrations, Voker cranked interest rates

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Speaker 1: ever higher to stem rising prices and slay an inflation monster.

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Speaker 1: He talked about it years later in a retrospective for

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Speaker 1: the Federal Reserve. I do think there was a feeling

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Speaker 1: in the country then that there was something of an

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Speaker 1: emergency that had to be dealt with, had to be

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Speaker 1: dealt with by forceful action, and that kind of common

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Speaker 1: sense reaction that there would be a little pain and

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Speaker 1: impressss who struggled through those times would argue that a

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Speaker 1: little pain is a gross understatement. The prime lending rate

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Speaker 1: went to twenty one and a half percent today. Before

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Speaker 1: this week, it had never an American history been above

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Speaker 1: twenty Volker was vilified in some quarters for the impact

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Speaker 1: of those borrowing costs on businesses. There was a cement

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Speaker 1: company that used to put ads, full page ads in

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Speaker 1: the Wall Street Journal, sculling crossbones under my name or

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Speaker 1: under my picture or whatever, and they kind of rankled.

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Speaker 1: The outcry at the time was widespread. Farmers protested by

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Speaker 1: blockading the FEDS Washington d C. Headquarters with their tractors.

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Speaker 1: Home Builders and carpenters wrote Volker's name and fed address

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Speaker 1: on sections of two by four lumber and mailed them

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Speaker 1: complaining they had no use for wood since no one

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Speaker 1: was buying houses. The pain was also felt by carmakers.

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Speaker 1: The price of the car is bad enough that the

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Speaker 1: interest rate is ridiculous. Ultimately, though Vulker's tough medicine cured

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Speaker 1: the inflation problem. The inflation numbers from three came out

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Speaker 1: and they were the lowest that they have been since

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Speaker 1: nineteen seventy two, three point eight percent. That's down for

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Speaker 1: more than twelve percent in nineteen eighty and by the

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Speaker 1: end of nineteen eighty six, the consumer price index had

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Speaker 1: settled down to one point one percent. The achievement laid

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Speaker 1: the foundation for the economic expansions presided over by his successors,

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Speaker 1: Alan Greenspan and Ben Burnike. Folker would quip that the

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Speaker 1: best new financial product in recent decades was the automated

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Speaker 1: teller machine and scorned financial industry innovations such as credit

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Speaker 1: default swaps, mindful of the risks of the free market.

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Speaker 1: Financial crises have been a recurrent feature of free and

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Speaker 1: open carpital markets, not reached in the United States the

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Speaker 1: forty years of relative cran quality, where the exception up

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Speaker 1: the norm. Foker established a reputation as something of a

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Speaker 1: one man economic cleanup crew, called upon early in his

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Speaker 1: career at the Treasury Department to devise a successor to

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Speaker 1: the gold Standard, and again, as the nation was struggling

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Speaker 1: to pull out of the worst financial crisis since the

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Speaker 1: Great Depression, he counseled Barack Obama as head of the

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Speaker 1: Economic Recovery Advisory Board, proposing a simple, common sense reform

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Speaker 1: which we're calling the Vocal Rule. After this tall guy

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Speaker 1: behind me. Banks will no longer be allowed to own,

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Speaker 1: invest or sponsor hedge funds, private equity funds, or proprietary

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Speaker 1: trading operations for their own profit unrelated to serving their customers.

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Speaker 1: We cannot accept a system in which shareholders make money

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Speaker 1: on these operations if the bank wins, but tax bears

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Speaker 1: for the bill if the bank loses. When Vocal first

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Speaker 1: proposed banning speculation by federally insured banks in two thousand nine.

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Speaker 1: He did it in one paragraph. Four years later, the

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Speaker 1: nation's regulators issued a rule based on Volker's idea that

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Speaker 1: ran close to one hundred pages. Ultimately, much of the

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Speaker 1: so called vocal rule was rolled back, but he continued

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Speaker 1: to counsel against in anything goes approach that just doesn't fly.

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Speaker 1: And that's where we were, and that's what broke down.

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Speaker 1: Paul Volker, who stood six ft seven, was a giant

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Speaker 1: of the financial world through a career that spanned more

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Speaker 1: than half a century. He was ninety two years old.

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Speaker 1: I'm Bob Moon Bloomberg Radio. Thank you so much. Just

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Speaker 1: just extraordinary well done. How Bob does that? We are

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Speaker 1: so fortunate to have a former chairman of the sec

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Speaker 1: joint us Arthur Lovitt joins us now on chairman Broke Voker. Arthur,

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Speaker 1: I know you stood at lunch is, breakfast, dinners and

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Speaker 1: insecurities meetings listening to the impossible to accomplish theories of

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Speaker 1: Paul Woker, how gauge for us colored for us, if

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Speaker 1: you will, the absolute doubt that he could bring inflation down.

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Speaker 1: I think his policies, which were the right policies at

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Speaker 1: the time he issued them and spoke about them, there

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Speaker 1: was enormous skepticism and the financial community, and my personal

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Speaker 1: experience with him was that I believed him. I believed

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Speaker 1: in him, and I was very vocal in my support

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Speaker 1: for him, and he never forgot that. Uh. This goes

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Speaker 1: back nearly thirty years, and it's hard to imagine how

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Speaker 1: how much he was criticized for raising interest rates to

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Speaker 1: those levels. And Volca was a very straightforward, plain man

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Speaker 1: who spoke uh in plain, direct English. There was absolutely

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Speaker 1: no artifice, no guile, no game playing. He was straightforward,

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Speaker 1: upright and decent. He was as decent a person as

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Speaker 1: I've known in my whole life, and I was blessed

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Speaker 1: by the experience of having known him. He's been complicated, straightforward.

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Speaker 1: I like that. I like that Arthur uncomplicated. Out of

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Speaker 1: tea Neck, New Jersey, a pretty basic up ringing. His

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Speaker 1: father ran the government of te Neck for a while,

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Speaker 1: there was a mnicipal manager. But what I always felt

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Speaker 1: Arthur is so many people missed his absolute prodigious academics.

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Speaker 1: His command out of Princeton of the material to me,

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Speaker 1: was the foundation of his courage. He was. He was

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Speaker 1: truly The depth of his perspective was just extraordinary. Was

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Speaker 1: that evident in those great battles of the late seventies? Yes,

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Speaker 1: it was very evident that this was a man who

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Speaker 1: spoke without artifice, without gyle, with none of the embellishments

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Speaker 1: of the typical financial commentator of the period, and he

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Speaker 1: spoke in such direct terms that the average citizen could

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Speaker 1: easily understand what he was driving in and what he

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Speaker 1: was about. Arthur, give us a sense, take us back

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Speaker 1: if he would back to those late seventies. What kind

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Speaker 1: of support, if any, did fed Chairman Vulker see from

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Speaker 1: the broader financial community for his actions to try to

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Speaker 1: reign in inflation. He had some support, but it was limited.

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Speaker 1: It was by no means a public outcry on his behalf.

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Speaker 1: There were relatively few people who were outspoken in their

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Speaker 1: supportive Paul Vulcar, but he deeply appreciated whatever support he

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Speaker 1: got and maintained those as his most important relationships later

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Speaker 1: in life. He was an incredibly loyal individual individual throughout

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Speaker 1: his public and private lives, and his friendships were deep

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Speaker 1: and sustaining. He shared an office with a man named

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Speaker 1: Dick Ravit Yeah, and the two of them were close

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Speaker 1: up until the time that that Vulcar passed away, and

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Speaker 1: he maintained similar relationships with a number of people throughout

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Speaker 1: his life. And these were not people that were necessarily

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Speaker 1: the most well known. They were people who he valued

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Speaker 1: for their support and their friendship and their intelligence. Arthur,

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Speaker 1: we are so thrilled that you're with us today, Arthur Levett,

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Speaker 1: the former chairman of the Securities and Exchange Commission. We're

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Speaker 1: now working to get a number of guests. I'm thrilled

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Speaker 1: to tell you that John Writing of RDQ Economics schedule

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Speaker 1: to join us here. Uh in a bit, if you're

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Speaker 1: just tuning in. The former Chairman of the Federal Reserve,

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Speaker 1: Paul Woker, his dead at ninety two. He's been extremely sick.

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Speaker 1: Paul extremely sick over the recent months. This is to

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Speaker 1: all of his friends and acquaintances of those walks around

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Speaker 1: the Upper east Side that you see him on. This

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Speaker 1: has not been a surprise in coming not been a surprise.

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Speaker 1: But as Bob Moon so uh, you know, elegantly put

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Speaker 1: and Arthur Levitt that commented as well, just an extraordinary

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Speaker 1: career in an out of public service. And you think back,

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Speaker 1: which it's hard for us to do. When you look

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Speaker 1: at inflation right now at one you know some of

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Speaker 1: those double digit numbers, it's just extraordinary. Well it was,

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Speaker 1: and it was the courage of lifting rates to break

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Speaker 1: it in the intellectual foundations and debate of that we're

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Speaker 1: as great as anything that we have today. Paul Workers

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Speaker 1: dead at ninety two. He has been very very ill.

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Speaker 1: This has been widely expected among the economics community, in

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Speaker 1: the New York financial community as well. We continue our

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Speaker 1: coverage Paul Sweeney in New York. I'm Tom keenan London.

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Speaker 1: Were thrilled to Diane swonk as with us, with Grant

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Speaker 1: Thornton on short notice, and of course our Michael McKee

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Speaker 1: joins us as well. Michael, of the group here, you're

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Speaker 1: the only one like me old enough to remember this agony.

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Speaker 1: Diane Wark was far too young. What were the theoretical

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Speaker 1: underpinnings to Paul Worker's courage? Were they evident? No? Not particularly.

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Speaker 1: But he came in and he changed the monetary policy

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Speaker 1: regime of the Fed to target the money supply, which

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Speaker 1: he said gave them two advantages when it was a

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Speaker 1: simple message to convey what they were doing. And he

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Speaker 1: said it also created an internal discipline within the FED.

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Speaker 1: I think there's a third thing that it did that

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Speaker 1: he wouldn't exactly say, but it it confused the markets

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Speaker 1: in the sense that, um, you had to uh focus

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Speaker 1: on the money supply as opposed to the level of

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Speaker 1: interest rates. That was the secondary effect. And so he

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Speaker 1: didn't just come in and say I'm raising rates. They

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Speaker 1: targeted the money supply. Therefore freights went up. Wasn't the

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Speaker 1: FEDS fault? People still felt it was the FEDS fault,

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Speaker 1: but but it took some of the pressure off diets walk.

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Speaker 1: This is fast and at as Mike shows the fixation

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Speaker 1: of M one, M two, M three, and I'm gonna

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Speaker 1: call the Chicago thought. Uh. Ages ago you were at

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Speaker 1: Michigan with a much more holistic economics. As well as

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Speaker 1: you've studied the courage of late Paul Volker. What was

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Speaker 1: the distinction that he executed in the late seventies and

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Speaker 1: into the early eighties. Well, not only did he dissent

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Speaker 1: and he voted against some of the stimulus that brought

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Speaker 1: us the stiflation of the latter part of the nineteen seventies,

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Speaker 1: he had the independence in fortitude to break the back

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Speaker 1: of inflation in the back to back recessions of and

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Speaker 1: a galaxy far away, far away, when we still had

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Speaker 1: inflation and ruining purchasing power, and people really forget how

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Speaker 1: corrosive and damaging that period was. And what's really important

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Speaker 1: to remember is when you turned this picket back on,

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Speaker 1: when he was done breaking the backup inflation, the economy

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Speaker 1: recovered in a way we've not seen since. There is

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Speaker 1: an ability that then but not only stop inflation, which

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Speaker 1: we have more tools to do, but also to reignite

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Speaker 1: growth in the nineteen eighties, and I think that's very

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Speaker 1: important as well. Also, Paul Boker had to resign. He

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Speaker 1: was pushed out at the Federal Reserve because of his

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Speaker 1: um backlash to deregulation in the financial services industry, and

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Speaker 1: Alan Greenspan was chosen as someone they thought at the

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Speaker 1: time was a political lackey that would be easy to manipulate.

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Speaker 1: They were wrong about that as well, they later found out.

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Speaker 1: But I think that's very important to remember as well,

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Speaker 1: that Paul Boker fought many of the deregulation any things

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Speaker 1: that some people believe contributed to the financial crisis in

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Speaker 1: two thousand and name so, Michael McKee One of the

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Speaker 1: things that the FED has to deal with today is

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Speaker 1: political pressure coming from the White House administration. Take us

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Speaker 1: back to those late seventies early eighties when former FED

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Speaker 1: Chairman Volker was, you know, working with the economy and

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Speaker 1: the result was indust rates going much higher. How much

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Speaker 1: support and our pushback did the FED have to deal

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Speaker 1: with him? Interestingly enough, he didn't get a huge amount

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Speaker 1: of pushback from the Carter administration. Jimmy Carter had put

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Speaker 1: him in there to do something about inflation. Uh, so

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Speaker 1: nothing like what we see today. But he did get

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Speaker 1: a lot of pushback from industry and consumers. We had

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Speaker 1: been builders, homebuilders delivering crates of two by fours to

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Speaker 1: the FED in protests. There were death threats. He had

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Speaker 1: to have a guard assigned to him. So it wasn't

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Speaker 1: an easy time at all. Uh. And of course anybody

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Speaker 1: who applied for mortgage in those days was that it

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Speaker 1: wasn't it wasn't a good time. When you create a

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Speaker 1: couple of recessions, Uh, you are definitely putting your career

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Speaker 1: and your reputation on the line. Diane, As we look

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Speaker 1: back now at some of the FED chair people to

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Speaker 1: chairman to succeed Mr Vulker, what do you think his

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Speaker 1: legacy was for those that succeeded him. Well, you know,

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Speaker 1: it's really interesting is even people you know, people like

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Speaker 1: Janet Ellen who was working at the Photo Reserve of

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Speaker 1: the nineteen seventies during this day inflation, or Stan Fisher,

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Speaker 1: who's your same age, who also was working as an

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Speaker 1: economist in the nineteen seventies. There was a legacy that

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Speaker 1: we saw that came out of that era, a fear

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Speaker 1: of going back to that kind of inflationary problem, and

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Speaker 1: it's part of the reason why you saw so many

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Speaker 1: different views about what should happen in the way that

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Speaker 1: the crisis and fears that inflation would come back. Now

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Speaker 1: those fears proved wrong, and that it's a different era

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Speaker 1: with different dynamics. But I think it really is important

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Speaker 1: that he forced people to think hard about what the

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Speaker 1: consequences of that action the day could be down the road.

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Speaker 1: And Dan swak there's a photograph of President Reagan and

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Speaker 1: this is the Reagan that Michael mckeennew before ray Vic

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Speaker 1: with Chairman Vulker. I'm guessing and the accessibility of this

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Speaker 1: exceptionally smart individual was just extraordinary. I think of one

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Speaker 1: of your great mentors Ned Graham, like at Michigan the wait,

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Speaker 1: his accessibility to me was truly second to none. He

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Speaker 1: really was accessible. And you know this is remember there

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Speaker 1: were stories written about him to smoking his cigars and

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Speaker 1: how kind of he lived his life in a very

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Speaker 1: low key way. This is not someone who considered himself

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Speaker 1: out of an ivory tower in any way whatsoever. And

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Speaker 1: I think I remember reading those stories in school and thinking,

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Speaker 1: you know this, I mean, he was someone to be

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Speaker 1: revered and someone to be admired given what was going

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Speaker 1: on and in industry, as Michael pointed out, I mean

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Speaker 1: I was in the heart of the auto industry that

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Speaker 1: was taking the burn of this. Remember just miles north

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Speaker 1: of me when I was in Ann Harbor. Unemployment rate

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Speaker 1: and flot Michigan went up above twenty five during this era,

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Speaker 1: So you know, it really was a difficult time to

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Speaker 1: be in his position, and he handled it in in

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Speaker 1: a totally unique way and being a human being. Now

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Speaker 1: we are out of time. This has been wonderful. Michael McKeith,

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Speaker 1: thank you so much for joining us out of all

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Speaker 1: of our economic coverage Bloomberg Radio, Bloomberg Television, diet swamps.

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Speaker 1: Thank you so much for joining us with Grant Thornton.

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Speaker 1: I just really extraordinary. Today Chairman Voker has died ninety

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Speaker 1: two years old. Paul Woker has been grievously ill for

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Speaker 1: some months now. This is not a surprise to the

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Speaker 1: economics community, but nevertheless it marks a significant passing. We

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Speaker 1: are thrilled now to bring you John Riding of rt

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Speaker 1: Q Economics, who has an underlying theory which so much

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Speaker 1: links to the theory of Paul Boker. John, I am

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Speaker 1: thrilled you could join us. This was not Keynesian theory

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Speaker 1: neo Keynesian theory. It was a belief in the foundation

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Speaker 1: of interest rates, the linkage to money. It goes back

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Speaker 1: to Irving Fisher f I s H. E. R. Moving

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Speaker 1: forward even to the textbooks of Stanley Fisher. The former

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Speaker 1: vice chairman, described for us the monetary fervor of the

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Speaker 1: seventies that led to vocals courage. Well, I think it's

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Speaker 1: very difficult in these low inflation times for people who

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Speaker 1: are much younger than you and I to even comprehend

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Speaker 1: the inflation problems of the nineties seventies, both in the

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Speaker 1: UK where I was studying economics at the time, at

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Speaker 1: Cambridge University, and here in the US inflation reached double digits,

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Speaker 1: was a persistent rise. People would teaching the idea that

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Speaker 1: maybe we're supposed to beating inflation. We should index the

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Speaker 1: tax system, we should should index wages, we should accommodate inflation.

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Speaker 1: And really Paul Walker was the person with the political

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Speaker 1: courage to do what Arthur Byrne said they could have

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Speaker 1: done any time, but didn't have the will to do it,

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Speaker 1: which was to defeat inflation. But the economic consequences of

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Speaker 1: defeating inflation, because people's expectations were not aligned to a

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Speaker 1: lower inflation rate, were very significant. For a period of time,

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Speaker 1: it was so important here folks, and this goes back

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Speaker 1: John to the world stopped. I believe it was Thursday

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Speaker 1: at three or four pm, and they announced M one,

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Speaker 1: M two, M three. John explain out of Nut Vixel,

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Speaker 1: and you're one of our great Vixellian economists, how we

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Speaker 1: got to the monetary The monetorism went rather of of

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Speaker 1: Professor Freeman in Chicago and the great David Laidler, the

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Speaker 1: giant of Western Ontario. What did they what was their

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Speaker 1: ferment that led Volker to the courage in the late seventies. Well,

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Speaker 1: it was really the idea that inflation, in the words

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Speaker 1: of Mount Freetment, is always in everywhere and monetary phenomenon. Now.

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Speaker 1: At the time that was probably more belief in what

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Speaker 1: I call high Church monetarism, the idea that strictly control

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Speaker 1: the money supply would in turn lead to strict control

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Speaker 1: of inflation. And in that sense the view was was wrong.

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Speaker 1: But the interesting decision the banking did something very similar

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Speaker 1: were this This set had been announcing the level of

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Speaker 1: interest rates that it was controlling. It dropped that and

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Speaker 1: moved to this monetary targeting. Really because Falcon New and

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Speaker 1: the Bank of England knew as well the interest rates

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Speaker 1: were going to go to politically unacceptable level, so it

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Speaker 1: had to be the market setting interest rates, not the

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Speaker 1: Federal Reserve setting interest rates, or to be more tractors

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Speaker 1: on the doorstep the set more people uh complaints from

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Speaker 1: agricultural lobby and others, so that they switched to saying,

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Speaker 1: if we control the money supply this pace, it will

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Speaker 1: bring inflation down. But if people don't adjust the expectations,

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Speaker 1: then the market is going to set interest rates much higher.

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Speaker 1: And that is effectively what happened for a short period

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Speaker 1: of time of a couple of years. Then the world

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Speaker 1: moved back to more formal interest rate targeting, which the

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Speaker 1: fact finally came out and in the year early and

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Speaker 1: admitted that they were talking interest rates again when when

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Speaker 1: we all knew that but for a while, which really

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Speaker 1: a very smart political decision to allow the market to

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Speaker 1: determine the interest rate consequences of controlling inflation. Hey, John,

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Speaker 1: what I find maybe most fascinating about the life of

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Speaker 1: Paul Vulgar is that twenty years after leaving the Federal

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Speaker 1: Reserve at the age of eighty one, President Obama taps

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Speaker 1: him to come in take a look at the banks

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Speaker 1: after the financial crisis, or you know, right at the

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Speaker 1: end of the financial crisis, and the net result is

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Speaker 1: something called the vocal Vocal rule. Tell us what the

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Speaker 1: vocal rule is, what it does, and kind of what

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Speaker 1: its legacy has been. Well, as pro Voker described the

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Speaker 1: Fatal rule and how it's finally implemented and currently implements

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Speaker 1: quite differently. I actually went to listen to him right

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Speaker 1: around the time of him talking about the vocal which

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Speaker 1: is really very simple, which is, if you're a bank

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Speaker 1: and you're taking deposit assurance and therefore the risks in

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Speaker 1: a sense of subsidized by the taxpayer, who shouldn't be

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Speaker 1: out taking investment banking risk. Now we'd had a breakdown

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Speaker 1: of that separation between commercial banking investment banking, or you know,

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Speaker 1: in years leading up to that, and so in this

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Speaker 1: mind it was a very very simple proposition. In the end,

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Speaker 1: it was a hundred page regulation. So um, I don't

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Speaker 1: think it was implemented in the way that Paul would

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Speaker 1: necessarily have wanted it to be implemented. But in the

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Speaker 1: US we don't follow the spirit of the law. We

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Speaker 1: follow the letter of the low and the letter of

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Speaker 1: the law tends to be written very very long. John

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Speaker 1: writing with us with Q Economics as we consider the

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Speaker 1: life the heritage of Paul Poker debt at ninety two.

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Speaker 1: Uh this morning, I should say this weekend as well,

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Speaker 1: John Riding were in a new and modern age. You

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Speaker 1: codified in your time at bear Stearns the idea of

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Speaker 1: a central bank on the golf course, and that potting

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Speaker 1: range kept being moved. How deep, how deep was the

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Speaker 1: rough that Paul Walker was in explained to us just

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Speaker 1: exactly how bad it was at the bank of England

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Speaker 1: and the FED in nine seventy nine. That was it was,

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Speaker 1: It was very bad. In fact, it was on the

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Speaker 1: verge of leading to you know, major change in in

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Speaker 1: the political environment and the economic, tax and regulatory environment. UH.

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Speaker 1: In nine miss Statue was elected to inflation of the

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Speaker 1: UK goal closed much of them. Yeah, you know, the

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Speaker 1: US was not not class about that. But you know,

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Speaker 1: we had Lotald Reagan replacing Jimmy Coxon. Then we had

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Speaker 1: this view of that that race need to be low.

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Speaker 1: We need to incentive is the private sector to take

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Speaker 1: risk and not tax phantom gains away because inflation that

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Speaker 1: those kind of rates creates massive phantom games. Let's say

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Speaker 1: that the inflation rates ten percent, which about what it

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Speaker 1: was when Paul Walker came into the FED, and let's

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Speaker 1: say that nominal interest rates were twelve percent. You know,

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Speaker 1: the tax system is going to attach us if you

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Speaker 1: were really making twelve percent when the government's already taking

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Speaker 1: ten percent in terms of inflation. So capitalism was struggling

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Speaker 1: to function. There was a tremendous misallocation of resources. UH.

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Speaker 1: And that was something that Paul Valker need knew needed

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Speaker 1: to be fixed and had the courage to fix it,

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Speaker 1: John writing, thank you so much on short notice for

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Speaker 1: joining us today. He's a lad Q Economics and just

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Speaker 1: the thrill to have Mr Writing former Bank of England

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Speaker 1: and said remember where this is just a great, great unity.

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Speaker 1: Thanks for listening to The Bloomberg's Van Last podcast. Subscribe

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Speaker 1: and listen to interviews on Apple Podcasts, SoundCloud, or whichever

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Speaker 1: podcast platform you prefer. I'm on Twitter at Tom Keane

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Speaker 1: before the podcast. You can always catch us worldwide. I'm

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Speaker 1: Bloomberg Radio