Does Former Fed’s Selection as Chair Mean “Volcker’s Recession” Revisited?

Florida homeowners fearful of more job losses and a prolonged recession may have something to look forward to.   Maybe.

As part of his latest bid to reassure anxious consumers and weary financial markets, President-elect Barack Obama announced this morning that he has chosen former Federal Reserve Chairman Paul Volcker to Chair the President’s Economic Recovery Advisory Board, explaining that Volcker – who was an advisor on Obama’s campaign committee – is a voice he knows and trusts.

Note: While Vlocker will Chair the Advisory Board, University of Chicago Economist Austan Goolsbee, a long-time Obama advisor, will serve as the board’s Staff Advisor and main overseer. He will also retain one the three positions on the White House Council of Economic Advisors.

The Economic Recovery Advisory Board will report the President, Vice-President, and the President’s economic team. Obama made clear his intentions of establishing this advisory board as an independently structured and minded group that will function more as an outside entity. He supported this intention by stating he will be appointing individuals and leaders from the labor force, business and academics.

Sometimes policymaking in Washington can become too insular. The walls of the echo chamber can sometimes keep out fresh voices and new ways of thinking – and those who serve in Washington don’t always have a ground-level sense of which programs and policies are working for people, and which aren’t. - President-Elect Barack Obama

I really like the idea of having an outside voice as part of the overall think tank collective working to overcome our present and future economic challenges.   However, I initially had some concern with Volcker’s appointment based on my understanding of what went down during his stint as Fed Chairman under Presidents Carter and Reagan – the time leading up to and during what is known as “The Volcker Recession.” Then I did my homework…

A Basic Overview of the “Volcker Recession” – Will We See Signs of it Again?

For those of you who are unaware, or just need a refresher – the “Volcker Recession” is a term widely used to reference the period of time during the late 1970s – early 1980s when then Fed Chairman Paul Volcker took what most agree was a rather heavy handed approach to “slaying the dragon” of inflation.   Though his approach ultimately kept inflation in check and set the stage for economic recovery, it also caused a situation resulting in the following:

• Interest rates rose so high that banks rationed credit
• The average interest rate 30-year Fixed Rate Mortgage had an interest rate of 18.5%
• Businesses refused to borrow to invest
• Residential investment fell roughly 40%
  
• Housing starts dropped by about 50% between 1978 and 1982
  
• Unemployment reached almost 11%, and consumer spending on “durables” (such as appliances and cars) plummeted

However, by 1982 the inflation situation had pretty much been managed.   The Fed then began to combat high unemployment and consumer reluctance to invest in real estate by knocking its rate down to 9%, and then down to 6% by 1986.

Volcker’s policy, though heavy handed, worked.   It took a long time and had some pretty nasty latent effects, but as the old adage states: You eat an elephant not in one bite, but one bite at a time.

The fact that this guy has been through and seen more than most is a plus.   He realized that inflation was no way to stave off unemployment and stuck with the unpopular decision to stamp it out.   He was willing to sacrifice everything – even President Carter’s popularity – to get the job done.

Of course, a Post Keynesian view of the “Volcker Recession” would hold that nothing positive at all came out of it, and that all it did was teach economists and policymakers that a deep recession is necessary if you want to stave off inflation.

But I’m right.   And The Curious Capitalist, Justin Fox, over at TIME Magazine agrees that as it was in the 1980s he remains today - Paul Volcker continues to serve as the voice of prudence and of discipline in an era largely devoid of both.

Whether he’ll be a truly influential voice in a new administration that’s planning to throw hundreds of billions–maybe even trillions–of dollars at the economy to keep it from collapsing is something we’ll find out over the next couple of years. But for now his role in the Obama team at least exudes the reassuring vibe that maybe the grownups are about to take charge. - Justin Fox, The Curious Capitalist – TIME Magazine

So, what do YOU think?

What’s YOUR opinion on Volcker’s role on this new Advisory Board?   Will he and it truly have an “outsider’s” Voice?   Or, as may be referenced by Volcker’s past history in Washington politics, will the Board’s voice just end up being another voice in the echo of Washington Politics?

Photo Credit: Wikipedia Commons

I hope you found this post useful! As always, if you or anyone you know is in need of a local Florida mortgage loan originator, I’m your guy. Call me at 888-859-7418 or apply online for your Florida mortgage. We’ll keep you posted and let you know when it’s time to pull the trigger!

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