Paul Volker

In the late 1970's the United States was suffering from ruinous inflation from a variety of causes. Jimmy Carter appointed Paul Volker to head the Federal Reserve system in 1979 and Volker made his bones by determining to squeeze inflation out of the system. He did this by clamping down brutally on the money supply, raising the Federal funds rate to 20% and producing the worst recession since depression days. The country suffered, but inflation evaporated, and thus he broke inflation and made Ronald Reagan's career when the economy rebounded sharply. Reagan, however, didn't care for his pro regulation stance and ultimately replaced him with Alan Greenspan, who achieved an outsized reputation for financial genius before it became clear that his easy money policies and hands off regulatory stance had contributed greatly to building the monster that ate the world's financial system in 2007-2008.

After the fall, and Obama's election, Volker, who had been a key Obama advisor, wanted the Treasury post, but was shunted to an advisory role when Tim Geithner got the job. Obama,according to Suskind, had two somewhat rival sets of advisors, one led by Volker and the other by Summers and Geithner.

Summers and Geithner were heavily enmeshed in Wall Street, and had played roles in the deregulation that had helped fuel the bubble that burst. They subscribed to the "first do no harm" rule and thought the first order of business had to be to save the banks regardless. Volker still believed in forceful action, and thought a sanguinary destrustion of the worst offenders would pay off in the medium turn. Wipe out the banks too weak to survive on their own instead of propping them up with Federal bucks and the whole industry would improve its behavior, he thought.

Geithner and Summers won this battle, with an assist from Rahm Emanuel, and that's the world we live in now. For the most part, the perps are still in business and doing business in much the same old way.


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