Volcker (66 page)

4
. The letter is dated June 2, 1987, Personal Papers of Paul Volcker.

5
. The letter is dated August 1, 1987, Personal Papers of Paul Volcker.

6
. The letter is dated June 5, 1987, Personal Papers of Paul Volcker.

7
. The letter is dated June 3, 1987, Personal Papers of Paul Volcker.

8
.
Wall Street Journal
, June 3, 1987, p. 1 continued.

9
. “The Triumph of Central Banking?” 1990 Per Jacobsson Lecture, Washington, DC, September 23, 1990.

10
. Both talks were given at the joint meeting of the World Bank and International Monetary Fund.

11
. “The Triumph of Central Banking?” 1990 Per Jacobsson Lecture, Washington, DC, September 23, 1990, p. 3.

12
. Morse said after Volcker spoke, “The great deflation of the 1930s … was not very well handled, and … the politicians and the commentators were able to put much of the blame onto the central banks … Now, if in the 1980s there was a successful disinflation … and if at the same time the reputation of central banks were enhanced … then no one takes more credit for that than Paul Volcker.” See “The Triumph of Central Banking?,” p. 18.

13
. Ibid., p. 14.

14
. Ibid.

15
. PIPAV.

16
. Interview with Milton Friedman, October 1, 2000, at
www.pbs.org/wgbh/commandingheights/shared/minitext/int_miltonfriedman.html
.

17
. Paul Volcker and Toyoo Gyohten,
Changing Fortunes: The World's Money and the Threat to American Leadership
(New York: Times Books, 1992), p. 175.

18
.
Newsweek
, February 24, 1986, p. 46.

19
. Alan Blinder, “Panel Discussion I: What Have We Learned Since October 1979?” in
Reflections on Monetary Policy 25 Years After October 1979, Federal Reserve Bank of St. Louis
87, no. 2, part 2 (March/April 2005): 283.

20
. Blinder cites Otto Eckstein, a leading Keynesian econometrician (Otto Eckstein,
Core Inflation
[Englewood Cliffs, NJ: Prentice-Hall, 1981]), as an example of someone predicting an especially poor trade-off—which Blinder implies was not representative of the mainstream. But Arthur Okun, in “Efficient Disinflationary Policies,”
American Economic Review
68, no. 2 (May 1978), surveyed the existing econometric evidence that provides a range of estimates at that time. According to Marvin Goodfriend and Robert King in “The Incredible Volcker Disinflation,”
Journal of Monetary Economics
52, no. 5 (July 2005): 982–83, Okun's article implies that Volcker's “6 percentage point
reduction in inflation … would have led to a modern Great Contraction,” which it did not. None of this is meant to imply that the increase in unemployment was trivial. It was not. It implies only that Volcker's disinflation was less costly than professional economists expected.

21
. Volcker defined stable prices as “a situation in which expectations of generally rising (or falling) prices over a considerable period are not a pervasive influence on economic and financial behavior.” (See Paul Volcker, “We Can Survive Prosperity,” remarks at the Joint Meeting of the American Economic Association—American Finance Association, San Francisco, CA, December 28, 1983, p. 5.) That definition was later echoed by Alan Greenspan: “Price stability is that state in which expected changes in the general price level do not effectively alter business or household decisions” (see Transcript, Federal Open Market Committee Meeting, July 3, 1996, p. 51).

22
. See Goodfriend and King, “The Incredible Volcker Disinflation,” esp. pp. 1008–12.

23
. See Milton Friedman, “How to Give Monetarism a Bad Name,” in
Essays Prepared for the Joint Economic Committee
, Congress of the United States, June 27, 1985, Washington, DC, pp. 51–61; and see Allan Meltzer in
Administration's Fiscal Year 1983 Budget Proposal: Hearings Before the Senate Committee on Finance
, 97th Congress, 2nd Sess., February 23, 1982, Government Printing Office, Washington, DC, 1982, p. 180.

24
.
New York Times
, December 31, 1983, p. 29.

25
.
Newsweek
, February 24, 1986, p. 46.

26
. For evidence on the response of monetary policy to inflation during the Volcker-Greenspan period compared with earlier, see Richard Clarida, Jordi Gali, and Mark Gertler, “Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory,”
Quarterly Journal of Economics
115, no. 1 (February 2000): 147–80. They summarize (p. 148): “During the Volcker-Greenspan era the Federal Reserve adopted a proactive stance toward controlling inflation: it systematically raised real as well as nominal short term interest rates in response to higher expected inflation.”

27
. See chairman's remarks in
Reflections on Monetary Policy 25 Years After October 1979, Federal Reserve Bank of St. Louis
87, no. 2, part 2 (March/April 2005): 138.

28
. The letter is dated August 28, 1984, Personal Papers of Paul Volcker.

29
. See chapter 12.

30
. Alan Greenspan,
The Age of Turbulence
(New York: Penguin, 2007), p. 35.

31
. Politics prevented, in Burns's words, “the Federal Reserve … [from] frustrating the will of Congress to which it was responsible—a Congress that
was intent on providing additional services to the electorate.” See Arthur Burns, “The Anguish of Central Banking,” 1979 Per Jacobsson Lecture, Belgrade, Yugoslavia, September 30, 1979, p. 16.

32
.
New York Times
, August 28, 1981, p. D2.

33
.
The Federal Reserve's First Monetary Policy Report for 1984: Hearings Before the Senate Committee on Banking, Housing and Urban Affairs
, 98th Congress, 2nd Sess., February 8, 1984, p. 108.

34
. See
New York Times
, August 12, 1983, p. D2.

35
.
The Nomination of Alan Greenspan: Hearings Before the Senate Committee on Banking, Housing and Urban Affairs
, 100th Congress, 1st Sess., July 21, 1987, pp. 25 and 27.

36
. Rudolph G. Penner and C. Eugene Steuerle (“Budget Rules,”
National Tax Journal
57, no. 3 [September 2004]: 549) describe the history of the budget control rules legislated in the Budget Enforcement Act of 1990 as follows: “When it became apparent that GRH [Gramm-Rudman-Hollings] was not working, President George H. W. Bush began difficult, bipartisan negotiations with the Democratically-controlled Congress. The result was a significant deficit reduction package … The rules embodied in the agreement, which were adapted and extended under President Clinton's 1993 budget agreement, worked extremely well through 1997.” The 1998 surplus is described as a surprise on page 550 of the same article.

37
. Bob Woodward,
Maestro: Greenspan's Fed and the American Boom
(New York: Simon & Schuster, 2000), p. 221.

38
. A nice survey of the causes of the Great Moderation, and the starting date, is in Peter M. Summers, “What Caused the Great Moderation? Some Cross-Country Evidence,”
Federal Reserve Bank of Kansas City Economic Review
(3rd quarter 2005): 5–32. Summers mentions three standard explanations (p. 11): “Better monetary policy, structural changes in inventory management, and good luck.” Volcker's chairmanship of the Federal Reserve Board begins the regime of better monetary policy that continues through the Greenspan period (see Clarida, Gali, and Gertler, “Monetary Policy Rules and Macroeconomic Stability”). Ben Bernanke, in a talk entitled “The Great Moderation” before the Meetings of the Eastern Economic Association on February 20, 2004, suggests that the inventory improvement explanation may in fact be related to improved monetary policy (p. 15). “High and unstable inflation increases the variability of relative prices and real interest rates, for example, distorting decisions regarding consumption, capital investment, and inventory investment, among others.”

1
. The crisis is sometimes called the subprime mortgage crisis because the mortgage securities that were the source of the initial problem were below the top credit ratings. The label “World Financial Crisis” appears in
The Squam Lake Report
(Princeton, NJ: Princeton University Press, 2010), a brief book coauthored by fifteen financial economists offering detailed recommendations to guide financial reform. For a discussion of the development of the crisis, see Stephen Cecchetti, “Symposium: Early Phases of the Credit Crunch,”
Journal of Economic Perspectives
23 (Winter 2009): 51–75. An exhaustive description of the origins of the crisis is in
The Financial Crisis Inquiry Report
, submitted by the Financial Crisis Inquiry Commission Pursuant to Public Law 111-21, January 2011, available at U.S. Government Printing Office, Washington, DC 20402.

2
. See “Radical Shift for Goldman and Morgan,”
New York Times
, September 22, 2008, p. A1.

3
. The demise of Lehman is told in Andrew Ross Sorkin,
Too Big to Fail: The Inside Story of How Wall Street and Washington Fought to Save the Financial System from Crisis—and Themselves
(New York: Viking, 2009). See William D. Cohan,
House of Cards: A Tale of Hubris and Wretched Excess on Wall Street
(New York: Doubleday, 2009), for the Bear Stearns story.

4
. PIPAV.

5
. See Paul Volcker, “Commercial Banks Must Match Profitability with Discipline,”
Financier
, August 1990, Personal Papers of Paul Volcker.

6
. The quote is from
Financial Services Competitiveness Act of 1995, Glass-Steagall Reform, and Related Issues: Hearings Before the House Committee on Banking and Financial Services
, 104th Congress, 1st Sess., March 29, April 5, 6, 1995, Washington, DC: Government Printing Office, p. 89. A related observation is made by Hyman Minsky,
Can “It” Happen Again? Essays on Instability and Finance
(Armonk, NY: M. E. Sharpe, 1982), p. 101: “Stability—or tranquility—in a world with a cyclical past and capitalist financial institutions is destabilizing.”

7
. The legislation in 1999 was the Gramm-Leach-Bliley Act, passed on November 12, 1999, which repealed the provisions of the Banking Act of 1933, commonly called the Glass-Steagall Act. The earlier Fed permissiveness refers to the 1987 decision discussed in chapter 15 dealing with bank underwriting. Volcker dissented from that ruling (see Minutes of the Federal Reserve Board, “Citicorp; J.P. Morgan & Co.; Bankers Trust New York Corporation, all of
New York, New York—Applications to underwrite and deal in certain securities,” April 29, 1987).

8
. See “Symposium: Early Phases of the Credit Crunch.”

9
. See
The Financial Services Competitiveness Act of 1995, Glass-Steagall Reform, and Related Issues: Hearings Before the House Committee on Banking and Financial Services
, 104th Congress, 1st Sess., March 29, April 5, 6, Washington, DC: Government Printing Office, p. 88. Volcker began his remarks with a reference to Goldman Sachs because the previous day Congressman Toby Roth raised the hypothetical issue of bailing out Goldman Sachs (see
Hearings
, p. 44).

10
. For more details on James D. Wolfensohn and Company, see Joseph Treaster,
Paul Volcker: The Making of a Financial Legend
(New York: John Wiley, 2004), pp. 194–98.

11
.
New York Times
, May 23, 1996, p. D1.

12
. Letter to Paul Volcker from Deborah Sale, vice president, Hospital for Special Surgery, dated March 4, 1997, Personal Papers of Paul Volcker.

13
. PIPAV.

14
. September 25, 1996, p. A20.

15
. See
The Disposition of Assets Deposited in Swiss Banks by Missing Nazi Victims: Hearings Before the House Committee on Banking and Financial Services
, 104th Congress, 2nd Sess., Washington, DC, December 11, 1996, p. 49.

16
. See “Under Fire, Andersen Puts Trust in Volcker,”
New York Times
, February 4, 2002, p. A18.

17
. See Volcker's testimony on the UN investigation before Congress in
Corruption in the United Nations Oil-for-Food Program: Reaching a Consensus on United Nations Reform: Hearings Before the Senate Committee on Homeland Security and Government Affairs
, 109th Congress, 1st Sess., Washington, DC, October 31, 2005, pp. 11–26.

18
. PIPAV.

19
. Statement by Paul Volcker in Support of Barack Obama, Personal Papers of Paul Volcker, excerpted in
Wall Street Journal
, Washington Wire, Eastern edition, February 1, 2008.

20
.
Wall Street Journal
, October 21, 2008, p. A1.

21
. Ibid.