WEBVTT - Surveillance Special: Paul Volcker's Legacy 0:00:00.080 --> 0:00:12.960 Ye, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keane. 0:00:13.480 --> 0:00:17.560 Daily we bring you insight from the best in economics, finance, investment, 0:00:18.000 --> 0:00:23.480 and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud, 0:00:23.600 --> 0:00:28.040 Bloomberg dot Com, and of course on the Bloomberg. Bloomberg 0:00:28.120 --> 0:00:31.800 Surveillance from London and from New York. Paul Sweeney in 0:00:31.840 --> 0:00:35.040 New York this morning. It has been a dreary and 0:00:35.159 --> 0:00:37.760 rainy day in New York, and now the sad news 0:00:37.800 --> 0:00:42.280 of Paul Woker has died here. I can't convey, folks, 0:00:42.720 --> 0:00:46.680 the courage, the intellectual courage of Paul Worker in the 0:00:46.760 --> 0:00:50.640 crucible of the late nineteen seventies and into the early 0:00:50.720 --> 0:00:55.560 nineteen eighties. There is no precedent in our financial history 0:00:55.680 --> 0:01:00.440 with an important report or Bob Moon is a friend. 0:01:01.800 --> 0:01:04.840 When Saturday Night Live made fun of Jimmy Carter's inflation 0:01:04.880 --> 0:01:07.800 headaches in the late nineteen seventies, it was rapidly becoming 0:01:07.800 --> 0:01:11.480 no laughing matter. In the two thousand, trans continued, the 0:01:11.520 --> 0:01:14.440 average blue collar annual wage in this country will be 0:01:14.480 --> 0:01:18.560 five hundred and sixty eight thousand dollars. Good evening prices 0:01:18.600 --> 0:01:21.120 in the United States during the first three months of 0:01:21.240 --> 0:01:24.039 nineteen seventy nine went up at an annual rate of 0:01:25.520 --> 0:01:27.880 That was the year Paul Woker became Chairman of the 0:01:27.920 --> 0:01:30.640 Federal Reserve. He would go on to be credited with 0:01:30.680 --> 0:01:34.000 breaking the back of inflation with some very tough medicine. 0:01:34.280 --> 0:01:37.559 Under the Carter and Reagan administrations, Voker cranked interest rates 0:01:37.600 --> 0:01:41.440 ever higher to stem rising prices and slay an inflation monster. 0:01:41.840 --> 0:01:44.160 He talked about it years later in a retrospective for 0:01:44.200 --> 0:01:48.120 the Federal Reserve. I do think there was a feeling 0:01:48.160 --> 0:01:50.760 in the country then that there was something of an 0:01:50.800 --> 0:01:53.000 emergency that had to be dealt with, had to be 0:01:53.080 --> 0:01:56.720 dealt with by forceful action, and that kind of common 0:01:56.800 --> 0:01:59.080 sense reaction that there would be a little pain and 0:01:59.160 --> 0:02:02.120 impressss who struggled through those times would argue that a 0:02:02.120 --> 0:02:05.400 little pain is a gross understatement. The prime lending rate 0:02:05.600 --> 0:02:08.400 went to twenty one and a half percent today. Before 0:02:08.440 --> 0:02:11.600 this week, it had never an American history been above 0:02:11.680 --> 0:02:14.960 twenty Volker was vilified in some quarters for the impact 0:02:14.960 --> 0:02:17.720 of those borrowing costs on businesses. There was a cement 0:02:17.800 --> 0:02:20.520 company that used to put ads, full page ads in 0:02:20.520 --> 0:02:23.880 the Wall Street Journal, sculling crossbones under my name or 0:02:23.919 --> 0:02:27.280 under my picture or whatever, and they kind of rankled. 0:02:27.760 --> 0:02:31.280 The outcry at the time was widespread. Farmers protested by 0:02:31.280 --> 0:02:34.600 blockading the FEDS Washington d C. Headquarters with their tractors. 0:02:34.919 --> 0:02:38.000 Home Builders and carpenters wrote Volker's name and fed address 0:02:38.120 --> 0:02:40.919 on sections of two by four lumber and mailed them 0:02:41.080 --> 0:02:43.840 complaining they had no use for wood since no one 0:02:43.960 --> 0:02:47.239 was buying houses. The pain was also felt by carmakers. 0:02:47.360 --> 0:02:49.040 The price of the car is bad enough that the 0:02:49.120 --> 0:02:53.239 interest rate is ridiculous. Ultimately, though Vulker's tough medicine cured 0:02:53.280 --> 0:02:56.600 the inflation problem. The inflation numbers from three came out 0:02:56.720 --> 0:02:58.440 and they were the lowest that they have been since 0:02:58.520 --> 0:03:02.720 nineteen seventy two, three point eight percent. That's down for 0:03:02.800 --> 0:03:05.040 more than twelve percent in nineteen eighty and by the 0:03:05.080 --> 0:03:07.640 end of nineteen eighty six, the consumer price index had 0:03:07.639 --> 0:03:11.040 settled down to one point one percent. The achievement laid 0:03:11.040 --> 0:03:15.000 the foundation for the economic expansions presided over by his successors, 0:03:15.200 --> 0:03:18.720 Alan Greenspan and Ben Burnike. Folker would quip that the 0:03:18.720 --> 0:03:22.160 best new financial product in recent decades was the automated 0:03:22.160 --> 0:03:26.239 teller machine and scorned financial industry innovations such as credit 0:03:26.280 --> 0:03:29.280 default swaps, mindful of the risks of the free market. 0:03:29.480 --> 0:03:32.520 Financial crises have been a recurrent feature of free and 0:03:32.560 --> 0:03:35.640 open carpital markets, not reached in the United States the 0:03:35.760 --> 0:03:39.120 forty years of relative cran quality, where the exception up 0:03:39.120 --> 0:03:42.040 the norm. Foker established a reputation as something of a 0:03:42.080 --> 0:03:45.200 one man economic cleanup crew, called upon early in his 0:03:45.280 --> 0:03:48.040 career at the Treasury Department to devise a successor to 0:03:48.080 --> 0:03:50.920 the gold Standard, and again, as the nation was struggling 0:03:50.960 --> 0:03:53.240 to pull out of the worst financial crisis since the 0:03:53.240 --> 0:03:56.440 Great Depression, he counseled Barack Obama as head of the 0:03:56.480 --> 0:04:01.040 Economic Recovery Advisory Board, proposing a simple, common sense reform 0:04:01.120 --> 0:04:04.040 which we're calling the Vocal Rule. After this tall guy 0:04:04.080 --> 0:04:08.760 behind me. Banks will no longer be allowed to own, 0:04:09.400 --> 0:04:14.000 invest or sponsor hedge funds, private equity funds, or proprietary 0:04:14.040 --> 0:04:18.400 trading operations for their own profit unrelated to serving their customers. 0:04:18.880 --> 0:04:21.719 We cannot accept a system in which shareholders make money 0:04:21.720 --> 0:04:25.000 on these operations if the bank wins, but tax bears 0:04:25.040 --> 0:04:27.760 for the bill if the bank loses. When Vocal first 0:04:27.800 --> 0:04:31.680 proposed banning speculation by federally insured banks in two thousand nine. 0:04:31.760 --> 0:04:34.560 He did it in one paragraph. Four years later, the 0:04:34.640 --> 0:04:37.719 nation's regulators issued a rule based on Volker's idea that 0:04:37.880 --> 0:04:41.080 ran close to one hundred pages. Ultimately, much of the 0:04:41.120 --> 0:04:44.080 so called vocal rule was rolled back, but he continued 0:04:44.120 --> 0:04:48.560 to counsel against in anything goes approach that just doesn't fly. 0:04:48.839 --> 0:04:52.479 And that's where we were, and that's what broke down. 0:04:52.680 --> 0:04:55.760 Paul Volker, who stood six ft seven, was a giant 0:04:55.800 --> 0:04:58.200 of the financial world through a career that spanned more 0:04:58.200 --> 0:05:01.200 than half a century. He was ninety two years old. 0:05:01.600 --> 0:05:05.080 I'm Bob Moon Bloomberg Radio. Thank you so much. Just 0:05:05.360 --> 0:05:08.880 just extraordinary well done. How Bob does that? We are 0:05:09.040 --> 0:05:12.360 so fortunate to have a former chairman of the sec 0:05:12.560 --> 0:05:16.960 joint us Arthur Lovitt joins us now on chairman Broke Voker. Arthur, 0:05:17.120 --> 0:05:20.760 I know you stood at lunch is, breakfast, dinners and 0:05:20.839 --> 0:05:27.039 insecurities meetings listening to the impossible to accomplish theories of 0:05:27.120 --> 0:05:30.640 Paul Woker, how gauge for us colored for us, if 0:05:30.680 --> 0:05:35.520 you will, the absolute doubt that he could bring inflation down. 0:05:36.960 --> 0:05:42.479 I think his policies, which were the right policies at 0:05:42.520 --> 0:05:46.920 the time he issued them and spoke about them, there 0:05:47.000 --> 0:05:54.120 was enormous skepticism and the financial community, and my personal 0:05:54.160 --> 0:05:59.080 experience with him was that I believed him. I believed 0:05:59.200 --> 0:06:03.800 in him, and I was very vocal in my support 0:06:03.920 --> 0:06:08.039 for him, and he never forgot that. Uh. This goes 0:06:08.120 --> 0:06:12.880 back nearly thirty years, and it's hard to imagine how 0:06:14.800 --> 0:06:19.800 how much he was criticized for raising interest rates to 0:06:19.920 --> 0:06:27.000 those levels. And Volca was a very straightforward, plain man 0:06:27.200 --> 0:06:33.280 who spoke uh in plain, direct English. There was absolutely 0:06:33.440 --> 0:06:39.960 no artifice, no guile, no game playing. He was straightforward, 0:06:40.279 --> 0:06:45.760 upright and decent. He was as decent a person as 0:06:45.800 --> 0:06:49.280 I've known in my whole life, and I was blessed 0:06:49.320 --> 0:06:54.599 by the experience of having known him. He's been complicated, straightforward. 0:06:54.640 --> 0:06:57.719 I like that. I like that Arthur uncomplicated. Out of 0:06:57.720 --> 0:07:00.440 tea Neck, New Jersey, a pretty basic up ringing. His 0:07:00.880 --> 0:07:03.240 father ran the government of te Neck for a while, 0:07:03.320 --> 0:07:07.279 there was a mnicipal manager. But what I always felt 0:07:07.440 --> 0:07:12.960 Arthur is so many people missed his absolute prodigious academics. 0:07:13.040 --> 0:07:17.760 His command out of Princeton of the material to me, 0:07:17.960 --> 0:07:21.400 was the foundation of his courage. He was. He was 0:07:21.600 --> 0:07:25.760 truly The depth of his perspective was just extraordinary. Was 0:07:25.760 --> 0:07:29.480 that evident in those great battles of the late seventies? Yes, 0:07:29.560 --> 0:07:32.400 it was very evident that this was a man who 0:07:32.440 --> 0:07:37.880 spoke without artifice, without gyle, with none of the embellishments 0:07:37.880 --> 0:07:41.640 of the typical financial commentator of the period, and he 0:07:41.680 --> 0:07:47.400 spoke in such direct terms that the average citizen could 0:07:47.480 --> 0:07:51.120 easily understand what he was driving in and what he 0:07:51.240 --> 0:07:54.320 was about. Arthur, give us a sense, take us back 0:07:54.320 --> 0:07:56.920 if he would back to those late seventies. What kind 0:07:56.960 --> 0:08:00.680 of support, if any, did fed Chairman Vulker see from 0:08:00.760 --> 0:08:03.920 the broader financial community for his actions to try to 0:08:03.960 --> 0:08:07.680 reign in inflation. He had some support, but it was limited. 0:08:07.960 --> 0:08:13.360 It was by no means a public outcry on his behalf. 0:08:14.160 --> 0:08:17.760 There were relatively few people who were outspoken in their 0:08:18.360 --> 0:08:23.440 supportive Paul Vulcar, but he deeply appreciated whatever support he 0:08:23.520 --> 0:08:30.320 got and maintained those as his most important relationships later 0:08:30.440 --> 0:08:36.240 in life. He was an incredibly loyal individual individual throughout 0:08:37.000 --> 0:08:41.800 his public and private lives, and his friendships were deep 0:08:41.840 --> 0:08:47.600 and sustaining. He shared an office with a man named 0:08:48.240 --> 0:08:53.360 Dick Ravit Yeah, and the two of them were close 0:08:53.920 --> 0:08:59.319 up until the time that that Vulcar passed away, and 0:08:59.720 --> 0:09:04.840 he maintained similar relationships with a number of people throughout 0:09:04.880 --> 0:09:08.240 his life. And these were not people that were necessarily 0:09:09.320 --> 0:09:12.840 the most well known. They were people who he valued 0:09:12.920 --> 0:09:16.960 for their support and their friendship and their intelligence. Arthur, 0:09:16.960 --> 0:09:19.960 we are so thrilled that you're with us today, Arthur Levett, 0:09:20.000 --> 0:09:23.920 the former chairman of the Securities and Exchange Commission. We're 0:09:23.920 --> 0:09:25.880 now working to get a number of guests. I'm thrilled 0:09:25.880 --> 0:09:28.840 to tell you that John Writing of RDQ Economics schedule 0:09:28.880 --> 0:09:31.920 to join us here. Uh in a bit, if you're 0:09:31.960 --> 0:09:34.320 just tuning in. The former Chairman of the Federal Reserve, 0:09:34.360 --> 0:09:38.360 Paul Woker, his dead at ninety two. He's been extremely sick. 0:09:38.400 --> 0:09:42.360 Paul extremely sick over the recent months. This is to 0:09:42.520 --> 0:09:45.720 all of his friends and acquaintances of those walks around 0:09:45.760 --> 0:09:48.240 the Upper east Side that you see him on. This 0:09:48.280 --> 0:09:51.040 has not been a surprise in coming not been a surprise. 0:09:51.080 --> 0:09:54.360 But as Bob Moon so uh, you know, elegantly put 0:09:54.440 --> 0:09:58.559 and Arthur Levitt that commented as well, just an extraordinary 0:09:58.679 --> 0:10:02.360 career in an out of public service. And you think back, 0:10:02.720 --> 0:10:04.000 which it's hard for us to do. When you look 0:10:04.000 --> 0:10:06.640 at inflation right now at one you know some of 0:10:06.679 --> 0:10:10.360 those double digit numbers, it's just extraordinary. Well it was, 0:10:10.440 --> 0:10:12.640 and it was the courage of lifting rates to break 0:10:12.640 --> 0:10:15.880 it in the intellectual foundations and debate of that we're 0:10:15.920 --> 0:10:33.280 as great as anything that we have today. Paul Workers 0:10:33.320 --> 0:10:36.000 dead at ninety two. He has been very very ill. 0:10:36.120 --> 0:10:40.240 This has been widely expected among the economics community, in 0:10:40.360 --> 0:10:44.520 the New York financial community as well. We continue our 0:10:44.559 --> 0:10:47.600 coverage Paul Sweeney in New York. I'm Tom keenan London. 0:10:47.640 --> 0:10:49.880 Were thrilled to Diane swonk as with us, with Grant 0:10:49.880 --> 0:10:53.400 Thornton on short notice, and of course our Michael McKee 0:10:53.480 --> 0:10:56.240 joins us as well. Michael, of the group here, you're 0:10:56.280 --> 0:10:59.080 the only one like me old enough to remember this agony. 0:10:59.440 --> 0:11:03.360 Diane Wark was far too young. What were the theoretical 0:11:03.559 --> 0:11:09.760 underpinnings to Paul Worker's courage? Were they evident? No? Not particularly. 0:11:09.920 --> 0:11:14.400 But he came in and he changed the monetary policy 0:11:14.480 --> 0:11:18.480 regime of the Fed to target the money supply, which 0:11:18.840 --> 0:11:21.320 he said gave them two advantages when it was a 0:11:21.360 --> 0:11:25.079 simple message to convey what they were doing. And he 0:11:25.120 --> 0:11:28.400 said it also created an internal discipline within the FED. 0:11:28.720 --> 0:11:31.760 I think there's a third thing that it did that 0:11:33.480 --> 0:11:37.520 he wouldn't exactly say, but it it confused the markets 0:11:37.520 --> 0:11:41.440 in the sense that, um, you had to uh focus 0:11:41.480 --> 0:11:43.920 on the money supply as opposed to the level of 0:11:43.960 --> 0:11:47.640 interest rates. That was the secondary effect. And so he 0:11:47.640 --> 0:11:50.640 didn't just come in and say I'm raising rates. They 0:11:50.679 --> 0:11:53.440 targeted the money supply. Therefore freights went up. Wasn't the 0:11:53.440 --> 0:11:56.520 FEDS fault? People still felt it was the FEDS fault, 0:11:56.640 --> 0:11:59.240 but but it took some of the pressure off diets walk. 0:11:59.360 --> 0:12:01.880 This is fast and at as Mike shows the fixation 0:12:01.960 --> 0:12:03.800 of M one, M two, M three, and I'm gonna 0:12:03.840 --> 0:12:07.719 call the Chicago thought. Uh. Ages ago you were at 0:12:07.840 --> 0:12:12.760 Michigan with a much more holistic economics. As well as 0:12:12.800 --> 0:12:16.520 you've studied the courage of late Paul Volker. What was 0:12:16.559 --> 0:12:20.800 the distinction that he executed in the late seventies and 0:12:20.880 --> 0:12:24.360 into the early eighties. Well, not only did he dissent 0:12:24.480 --> 0:12:27.400 and he voted against some of the stimulus that brought 0:12:27.480 --> 0:12:30.760 us the stiflation of the latter part of the nineteen seventies, 0:12:31.040 --> 0:12:33.800 he had the independence in fortitude to break the back 0:12:33.840 --> 0:12:38.840 of inflation in the back to back recessions of and 0:12:38.920 --> 0:12:41.839 a galaxy far away, far away, when we still had 0:12:41.880 --> 0:12:45.800 inflation and ruining purchasing power, and people really forget how 0:12:45.880 --> 0:12:50.440 corrosive and damaging that period was. And what's really important 0:12:50.440 --> 0:12:52.800 to remember is when you turned this picket back on, 0:12:52.880 --> 0:12:56.359 when he was done breaking the backup inflation, the economy 0:12:56.400 --> 0:12:59.160 recovered in a way we've not seen since. There is 0:12:59.160 --> 0:13:02.920 an ability that then but not only stop inflation, which 0:13:03.000 --> 0:13:06.319 we have more tools to do, but also to reignite 0:13:06.360 --> 0:13:09.120 growth in the nineteen eighties, and I think that's very 0:13:09.120 --> 0:13:12.240 important as well. Also, Paul Boker had to resign. He 0:13:12.440 --> 0:13:14.760 was pushed out at the Federal Reserve because of his 0:13:15.280 --> 0:13:19.079 um backlash to deregulation in the financial services industry, and 0:13:19.240 --> 0:13:22.160 Alan Greenspan was chosen as someone they thought at the 0:13:22.240 --> 0:13:25.720 time was a political lackey that would be easy to manipulate. 0:13:25.840 --> 0:13:28.320 They were wrong about that as well, they later found out. 0:13:28.520 --> 0:13:30.719 But I think that's very important to remember as well, 0:13:30.760 --> 0:13:34.920 that Paul Boker fought many of the deregulation any things 0:13:34.960 --> 0:13:38.240 that some people believe contributed to the financial crisis in 0:13:38.360 --> 0:13:40.880 two thousand and name so, Michael McKee One of the 0:13:40.960 --> 0:13:43.600 things that the FED has to deal with today is 0:13:44.040 --> 0:13:48.720 political pressure coming from the White House administration. Take us 0:13:48.720 --> 0:13:51.720 back to those late seventies early eighties when former FED 0:13:51.800 --> 0:13:55.040 Chairman Volker was, you know, working with the economy and 0:13:55.080 --> 0:13:57.520 the result was indust rates going much higher. How much 0:13:57.559 --> 0:14:00.280 support and our pushback did the FED have to deal 0:14:00.320 --> 0:14:02.840 with him? Interestingly enough, he didn't get a huge amount 0:14:02.840 --> 0:14:06.760 of pushback from the Carter administration. Jimmy Carter had put 0:14:06.800 --> 0:14:10.360 him in there to do something about inflation. Uh, so 0:14:10.480 --> 0:14:13.839 nothing like what we see today. But he did get 0:14:13.880 --> 0:14:17.360 a lot of pushback from industry and consumers. We had 0:14:17.400 --> 0:14:21.120 been builders, homebuilders delivering crates of two by fours to 0:14:21.200 --> 0:14:24.520 the FED in protests. There were death threats. He had 0:14:24.560 --> 0:14:28.360 to have a guard assigned to him. So it wasn't 0:14:28.440 --> 0:14:31.680 an easy time at all. Uh. And of course anybody 0:14:31.680 --> 0:14:35.440 who applied for mortgage in those days was that it 0:14:35.560 --> 0:14:39.080 wasn't it wasn't a good time. When you create a 0:14:39.120 --> 0:14:42.680 couple of recessions, Uh, you are definitely putting your career 0:14:42.720 --> 0:14:45.920 and your reputation on the line. Diane, As we look 0:14:45.960 --> 0:14:48.800 back now at some of the FED chair people to 0:14:49.360 --> 0:14:51.680 chairman to succeed Mr Vulker, what do you think his 0:14:51.840 --> 0:14:55.760 legacy was for those that succeeded him. Well, you know, 0:14:55.840 --> 0:14:58.680 it's really interesting is even people you know, people like 0:14:58.760 --> 0:15:00.920 Janet Ellen who was working at the Photo Reserve of 0:15:00.920 --> 0:15:03.840 the nineteen seventies during this day inflation, or Stan Fisher, 0:15:04.120 --> 0:15:07.160 who's your same age, who also was working as an 0:15:07.160 --> 0:15:10.560 economist in the nineteen seventies. There was a legacy that 0:15:10.600 --> 0:15:13.160 we saw that came out of that era, a fear 0:15:13.360 --> 0:15:16.760 of going back to that kind of inflationary problem, and 0:15:16.760 --> 0:15:19.200 it's part of the reason why you saw so many 0:15:19.680 --> 0:15:21.960 different views about what should happen in the way that 0:15:22.040 --> 0:15:25.120 the crisis and fears that inflation would come back. Now 0:15:25.120 --> 0:15:27.880 those fears proved wrong, and that it's a different era 0:15:28.000 --> 0:15:30.920 with different dynamics. But I think it really is important 0:15:31.000 --> 0:15:33.720 that he forced people to think hard about what the 0:15:33.760 --> 0:15:37.000 consequences of that action the day could be down the road. 0:15:37.720 --> 0:15:41.240 And Dan swak there's a photograph of President Reagan and 0:15:41.240 --> 0:15:44.080 this is the Reagan that Michael mckeennew before ray Vic 0:15:44.840 --> 0:15:51.520 with Chairman Vulker. I'm guessing and the accessibility of this 0:15:51.680 --> 0:15:57.160 exceptionally smart individual was just extraordinary. I think of one 0:15:57.160 --> 0:16:00.800 of your great mentors Ned Graham, like at Michigan the wait, 0:16:00.960 --> 0:16:06.600 his accessibility to me was truly second to none. He 0:16:06.720 --> 0:16:09.200 really was accessible. And you know this is remember there 0:16:09.200 --> 0:16:12.640 were stories written about him to smoking his cigars and 0:16:12.680 --> 0:16:15.240 how kind of he lived his life in a very 0:16:15.320 --> 0:16:18.080 low key way. This is not someone who considered himself 0:16:18.120 --> 0:16:21.160 out of an ivory tower in any way whatsoever. And 0:16:21.200 --> 0:16:24.880 I think I remember reading those stories in school and thinking, 0:16:24.880 --> 0:16:27.080 you know this, I mean, he was someone to be 0:16:27.160 --> 0:16:29.840 revered and someone to be admired given what was going 0:16:29.920 --> 0:16:32.640 on and in industry, as Michael pointed out, I mean 0:16:32.680 --> 0:16:34.200 I was in the heart of the auto industry that 0:16:34.280 --> 0:16:36.480 was taking the burn of this. Remember just miles north 0:16:36.520 --> 0:16:39.120 of me when I was in Ann Harbor. Unemployment rate 0:16:39.160 --> 0:16:42.080 and flot Michigan went up above twenty five during this era, 0:16:42.240 --> 0:16:45.200 So you know, it really was a difficult time to 0:16:45.280 --> 0:16:48.120 be in his position, and he handled it in in 0:16:48.160 --> 0:16:51.160 a totally unique way and being a human being. Now 0:16:51.200 --> 0:16:54.000 we are out of time. This has been wonderful. Michael McKeith, 0:16:54.080 --> 0:16:55.800 thank you so much for joining us out of all 0:16:55.800 --> 0:16:59.920 of our economic coverage Bloomberg Radio, Bloomberg Television, diet swamps. 0:17:00.080 --> 0:17:03.040 Thank you so much for joining us with Grant Thornton. 0:17:03.160 --> 0:17:20.080 I just really extraordinary. Today Chairman Voker has died ninety 0:17:20.119 --> 0:17:23.080 two years old. Paul Woker has been grievously ill for 0:17:23.240 --> 0:17:25.639 some months now. This is not a surprise to the 0:17:25.680 --> 0:17:31.439 economics community, but nevertheless it marks a significant passing. We 0:17:31.480 --> 0:17:34.399 are thrilled now to bring you John Riding of rt 0:17:34.560 --> 0:17:38.440 Q Economics, who has an underlying theory which so much 0:17:38.600 --> 0:17:42.680 links to the theory of Paul Boker. John, I am 0:17:42.720 --> 0:17:46.600 thrilled you could join us. This was not Keynesian theory 0:17:47.040 --> 0:17:51.720 neo Keynesian theory. It was a belief in the foundation 0:17:51.880 --> 0:17:55.560 of interest rates, the linkage to money. It goes back 0:17:55.600 --> 0:17:59.639 to Irving Fisher f I s H. E. R. Moving 0:17:59.680 --> 0:18:02.879 forward even to the textbooks of Stanley Fisher. The former 0:18:03.440 --> 0:18:07.800 vice chairman, described for us the monetary fervor of the 0:18:08.000 --> 0:18:12.640 seventies that led to vocals courage. Well, I think it's 0:18:12.920 --> 0:18:16.600 very difficult in these low inflation times for people who 0:18:16.680 --> 0:18:21.560 are much younger than you and I to even comprehend 0:18:22.320 --> 0:18:25.479 the inflation problems of the nineties seventies, both in the 0:18:25.600 --> 0:18:28.760 UK where I was studying economics at the time, at 0:18:28.760 --> 0:18:32.920 Cambridge University, and here in the US inflation reached double digits, 0:18:33.359 --> 0:18:36.840 was a persistent rise. People would teaching the idea that 0:18:37.280 --> 0:18:41.159 maybe we're supposed to beating inflation. We should index the 0:18:41.680 --> 0:18:47.400 tax system, we should should index wages, we should accommodate inflation. 0:18:48.119 --> 0:18:52.840 And really Paul Walker was the person with the political 0:18:53.000 --> 0:18:57.199 courage to do what Arthur Byrne said they could have 0:18:57.200 --> 0:18:59.159 done any time, but didn't have the will to do it, 0:18:59.160 --> 0:19:02.840 which was to defeat inflation. But the economic consequences of 0:19:02.880 --> 0:19:07.639 defeating inflation, because people's expectations were not aligned to a 0:19:07.840 --> 0:19:12.400 lower inflation rate, were very significant. For a period of time, 0:19:13.080 --> 0:19:15.360 it was so important here folks, and this goes back 0:19:15.440 --> 0:19:18.560 John to the world stopped. I believe it was Thursday 0:19:18.600 --> 0:19:20.880 at three or four pm, and they announced M one, 0:19:21.040 --> 0:19:25.000 M two, M three. John explain out of Nut Vixel, 0:19:25.119 --> 0:19:28.199 and you're one of our great Vixellian economists, how we 0:19:28.320 --> 0:19:32.480 got to the monetary The monetorism went rather of of 0:19:32.600 --> 0:19:35.960 Professor Freeman in Chicago and the great David Laidler, the 0:19:36.080 --> 0:19:40.480 giant of Western Ontario. What did they what was their 0:19:40.640 --> 0:19:46.280 ferment that led Volker to the courage in the late seventies. Well, 0:19:46.520 --> 0:19:49.840 it was really the idea that inflation, in the words 0:19:49.840 --> 0:19:53.240 of Mount Freetment, is always in everywhere and monetary phenomenon. Now. 0:19:53.280 --> 0:19:56.919 At the time that was probably more belief in what 0:19:57.040 --> 0:19:59.920 I call high Church monetarism, the idea that strictly control 0:20:00.200 --> 0:20:03.840 the money supply would in turn lead to strict control 0:20:03.880 --> 0:20:07.439 of inflation. And in that sense the view was was wrong. 0:20:07.520 --> 0:20:10.840 But the interesting decision the banking did something very similar 0:20:11.200 --> 0:20:15.960 were this This set had been announcing the level of 0:20:16.000 --> 0:20:19.199 interest rates that it was controlling. It dropped that and 0:20:19.320 --> 0:20:24.800 moved to this monetary targeting. Really because Falcon New and 0:20:24.840 --> 0:20:27.320 the Bank of England knew as well the interest rates 0:20:27.320 --> 0:20:30.240 were going to go to politically unacceptable level, so it 0:20:30.280 --> 0:20:33.240 had to be the market setting interest rates, not the 0:20:33.280 --> 0:20:36.640 Federal Reserve setting interest rates, or to be more tractors 0:20:36.680 --> 0:20:40.800 on the doorstep the set more people uh complaints from 0:20:40.800 --> 0:20:45.200 agricultural lobby and others, so that they switched to saying, 0:20:45.440 --> 0:20:48.520 if we control the money supply this pace, it will 0:20:48.560 --> 0:20:52.679 bring inflation down. But if people don't adjust the expectations, 0:20:52.960 --> 0:20:55.320 then the market is going to set interest rates much higher. 0:20:55.359 --> 0:20:58.800 And that is effectively what happened for a short period 0:20:58.880 --> 0:21:02.520 of time of a couple of years. Then the world 0:21:02.560 --> 0:21:06.080 moved back to more formal interest rate targeting, which the 0:21:06.119 --> 0:21:10.000 fact finally came out and in the year early and 0:21:10.160 --> 0:21:12.880 admitted that they were talking interest rates again when when 0:21:12.920 --> 0:21:15.240 we all knew that but for a while, which really 0:21:16.080 --> 0:21:21.520 a very smart political decision to allow the market to 0:21:21.640 --> 0:21:26.440 determine the interest rate consequences of controlling inflation. Hey, John, 0:21:26.480 --> 0:21:29.159 what I find maybe most fascinating about the life of 0:21:29.200 --> 0:21:31.879 Paul Vulgar is that twenty years after leaving the Federal 0:21:31.920 --> 0:21:35.119 Reserve at the age of eighty one, President Obama taps 0:21:35.200 --> 0:21:38.560 him to come in take a look at the banks 0:21:38.680 --> 0:21:41.080 after the financial crisis, or you know, right at the 0:21:41.119 --> 0:21:43.520 end of the financial crisis, and the net result is 0:21:43.560 --> 0:21:46.639 something called the vocal Vocal rule. Tell us what the 0:21:46.680 --> 0:21:49.840 vocal rule is, what it does, and kind of what 0:21:49.960 --> 0:21:54.200 its legacy has been. Well, as pro Voker described the 0:21:54.240 --> 0:21:57.600 Fatal rule and how it's finally implemented and currently implements 0:21:57.680 --> 0:22:03.600 quite differently. I actually went to listen to him right 0:22:03.640 --> 0:22:06.160 around the time of him talking about the vocal which 0:22:06.160 --> 0:22:08.040 is really very simple, which is, if you're a bank 0:22:08.080 --> 0:22:12.240 and you're taking deposit assurance and therefore the risks in 0:22:12.240 --> 0:22:14.960 a sense of subsidized by the taxpayer, who shouldn't be 0:22:14.960 --> 0:22:19.560 out taking investment banking risk. Now we'd had a breakdown 0:22:19.880 --> 0:22:24.639 of that separation between commercial banking investment banking, or you know, 0:22:25.400 --> 0:22:28.800 in years leading up to that, and so in this 0:22:30.000 --> 0:22:33.719 mind it was a very very simple proposition. In the end, 0:22:33.760 --> 0:22:37.720 it was a hundred page regulation. So um, I don't 0:22:37.800 --> 0:22:41.240 think it was implemented in the way that Paul would 0:22:41.359 --> 0:22:44.359 necessarily have wanted it to be implemented. But in the 0:22:44.480 --> 0:22:48.199 US we don't follow the spirit of the law. We 0:22:48.280 --> 0:22:49.920 follow the letter of the low and the letter of 0:22:49.960 --> 0:22:53.800 the law tends to be written very very long. John 0:22:53.880 --> 0:22:56.800 writing with us with Q Economics as we consider the 0:22:56.880 --> 0:22:59.880 life the heritage of Paul Poker debt at ninety two. 0:23:00.560 --> 0:23:03.880 Uh this morning, I should say this weekend as well, 0:23:04.240 --> 0:23:06.800 John Riding were in a new and modern age. You 0:23:06.920 --> 0:23:09.440 codified in your time at bear Stearns the idea of 0:23:09.520 --> 0:23:12.880 a central bank on the golf course, and that potting 0:23:13.000 --> 0:23:16.280 range kept being moved. How deep, how deep was the 0:23:16.400 --> 0:23:19.560 rough that Paul Walker was in explained to us just 0:23:19.720 --> 0:23:22.719 exactly how bad it was at the bank of England 0:23:22.720 --> 0:23:27.320 and the FED in nine seventy nine. That was it was, 0:23:27.640 --> 0:23:30.199 It was very bad. In fact, it was on the 0:23:30.280 --> 0:23:33.560 verge of leading to you know, major change in in 0:23:33.680 --> 0:23:38.919 the political environment and the economic, tax and regulatory environment. UH. 0:23:39.040 --> 0:23:42.520 In nine miss Statue was elected to inflation of the 0:23:42.560 --> 0:23:48.560 UK goal closed much of them. Yeah, you know, the 0:23:48.680 --> 0:23:52.560 US was not not class about that. But you know, 0:23:52.640 --> 0:23:56.560 we had Lotald Reagan replacing Jimmy Coxon. Then we had 0:23:56.560 --> 0:23:58.880 this view of that that race need to be low. 0:23:58.960 --> 0:24:02.040 We need to incentive is the private sector to take 0:24:02.240 --> 0:24:06.480 risk and not tax phantom gains away because inflation that 0:24:06.600 --> 0:24:10.600 those kind of rates creates massive phantom games. Let's say 0:24:10.840 --> 0:24:13.960 that the inflation rates ten percent, which about what it 0:24:14.080 --> 0:24:17.840 was when Paul Walker came into the FED, and let's 0:24:17.880 --> 0:24:22.080 say that nominal interest rates were twelve percent. You know, 0:24:22.160 --> 0:24:23.879 the tax system is going to attach us if you 0:24:23.920 --> 0:24:26.600 were really making twelve percent when the government's already taking 0:24:26.640 --> 0:24:31.280 ten percent in terms of inflation. So capitalism was struggling 0:24:31.480 --> 0:24:35.480 to function. There was a tremendous misallocation of resources. UH. 0:24:35.480 --> 0:24:39.840 And that was something that Paul Valker need knew needed 0:24:39.840 --> 0:24:42.760 to be fixed and had the courage to fix it, 0:24:43.760 --> 0:24:46.000 John writing, thank you so much on short notice for 0:24:46.080 --> 0:24:49.800 joining us today. He's a lad Q Economics and just 0:24:49.880 --> 0:24:52.560 the thrill to have Mr Writing former Bank of England 0:24:52.560 --> 0:24:56.800 and said remember where this is just a great, great unity. 0:24:58.160 --> 0:25:02.080 Thanks for listening to The Bloomberg's Van Last podcast. Subscribe 0:25:02.200 --> 0:25:07.000 and listen to interviews on Apple Podcasts, SoundCloud, or whichever 0:25:07.200 --> 0:25:11.160