Volcker '49 to head new economic advisory board
Former Federal Reserve Chairman Paul Volcker ’49 will head a newly created White House advisory board tasked with helping jumpstart the economy and stabilize financial markets, President-elect Barack Obama announced Wednesday.
The panel, the President’s Economic Recovery Advisory Board, will consist of prominent figures from different business sectors who can provide “fresh perspective to me and my administration,” Obama said at a news conference Wednesday.
“The inevitable recession can be moderated,” Volcker wrote in a Wall Street Journal op-ed in October. “There is, and must be, recognition of the essential role that free and competitive financial markets play in a vigorous, innovative economic system … But never again should so much economic damage be risked by a financial structure so fragile, so overextended, so opaque as that of recent years.”
Volcker, 81, was a Wilson School concentrator and grew up in Teaneck, N.J. He received his master’s degree in political economy from Harvard in 1951 then attended the London School of Economics on a Rotary fellowship. He is currently the chairman of the Washington, D.C.-based economic advisory body, the Group of 30. He could not be reached for comment for this article.
Volcker, who was appointed Fed chairman by Jimmy Carter in 1979 and continued in that position during Ronald Reagan’s presidency, is best known for quelling the runaway inflation brought on by the oil shocks of the 1970s.
While his decisions to tighten credit and increase interest rates were initially criticized for pushing the country into an economic recession in the early 1980s, Volcker’s approach was later praised for its success in ending the stagflation of the previous decade.
“He went through a baptism by fire in ’79,” fellow Wilson School concentrator James Warren ’49 said.
“That was an extraordinary period in which he said, ‘Let’s not fool around any longer in the overnight rate by which banks lend to one another. I’m going to chuck all that, and I’m going to operate on one principle only, and that was a [tight] money supply; let the interest rates go where they may,’ ” Warren explained. “And he did.”
Prior to being Fed chairman, Volcker played a key role in President Richard Nixon’s 1971 decision to end fixed exchange rates as Treasury Department undersecretary during the late 1960s and early 1970s.
After serving at the Fed, Volcker was chairman of J. Rothschild, Wolfensohn & Company, an investment banking venture. He has also led investigations into issues like the Enron scandals and corruption in the United Nations’ oil-for-food program in Iraq.
These experiences leave Volcker a seasoned practitioner of economic policy, professors in the economics department say, showering him with praise.
“With his unique experience from fighting the high inflation turbulence in the early 1980s as the chairman of the Federal Reserve, Mr. Volcker will bring maturity to the already experienced team,” professor Wei Xiong said in an e-mail, adding that Volcker, along with Timothy Geithner as the new treasury secretary and Lawrence Summers as the head of the National Economic Council, is a “dream team to lead America through its worst financial crisis in 70 years.”
For several months, Volcker has offered Obama advice on economic matters, leading many to expect that “Volcker, who has a towering influence from the 1980s as a hard nosed regulator, would be tapped by Obama to be a hard nosed regulator again,” professor Orley Ashenfelter GS ’70 said in an e-mail.
Professor Alan Krueger said in an e-mail that Volcker’s reputation and expertise make him the “perfect pick.”
“He does not hesitate to give unvarnished advice and he has the trust of key financial players and the president,” Krueger said.
Having served in both Democratic and Republican administrations as undersecretary of the Treasury and as chairman of the Federal Reserve, Volcker may bring “a tremendous independence of spirit,” fellow Wilson School concentrator Anthony O’Connor ’49 said.
Though “nobody knows the exact division of labor” among the different economic advisory groups, professor Markus Brunnermeier said he expected the new panel to “focus primarily [on] new regulation of the financial system.”
Volcker’s new position will require him to address “long-run problems ... such as structural deficits, low private savings, lack of transparency in financial markets and neglect for public sector employment,” Krueger said.
Brunnermeier predicted that Volcker will “really focus a lot on CEO compensations to give CEOs incentives ... to not focus on the short-run gains at the expense of long-run loss.”
“He has a strong sense of duty to serve the common public,” Brunnermeier added.
In addition, he “can help [the] Obama government to make various tough decisions such as which institutions [the] government [should] bail out” and when the government should stop subsidizing those institutions, professor Nobuhiro Kiyotaki said in an e-mail.
“What’s lacking now in financial markets is confidence,” Brunnermeier explained. “[Volcker] brings confidence back.”