Paul Volcker has the ball – the NY Post believes that Former Fed Chaimain .Paul Volcker is now in charge of how to clean up the financial mess. The picture of President Obama’s announcememt to the press strongly indicates that, since nothing the President does for TV is accidental. Tim Geither is way at the end of the line of peope, staring at the ground. Volker is next to President Obama with Barney Frank in between. Timmy is going to Congress next week to defend his decision to bail out AIG to the benefit of Goldman Sachs.
So what does this mean about the future? Volcker was appointed to the Fed Chairmanship by Jimmy Carter in late 1979 after his the previous Fed Chairman had let inflation get totally out of control. Volker had decided that the way to deal with the economy was to keep the growth in the money supply under control – believing that excess money in circulation was the cause of inflation.
By ignoring intererst rates, he brought the country to its knees, bringing the fed funds rates to 20% (that’s the rate Bernanke is holding near 0% now), which initially just caused more inflation without slowing the economy. People began making investments based on the belief that inflation would continue to grow and grow.
After Ronald Reagan was elected, the economy went into a deep recession as the brakes were slammed on runaway government spending. Only after Reagan’s massive tax cuts were implemented and business was assured it was safe to invest again did the economy recover. Volker served during most of the remainer of Reagan’s time in office, leaving in 1987 to be followed by Alan Greenspan, the guy who created the current mess.
It’s hard to imagine that Volcker isn’t going to suggest we need to make interest rates go back up. For companies that have LIBOR based loans or have agreed to pay the LIBOR side of interest rate swaps, that could be a disaster (assuming the U.S. can actually affect interest rates any more) LIBOR didn’t exist prior to 1984, so there is a serious risk here of “the generals refighting the last war”.
But if it means Geither and/or Bernanke get the boot, it can’t be all bad.
