Eye on Obamerica: Volcker Kept on the Bench

The media this morning reported that Paul Volcker, former Governor of the Federal Reserve, is being kept at a distance from important economic decisions and meetings by Larry Summers, the Director of the National Economic Council. While we can’t verify these reports, the fact is, Volcker has only attended one White House meeting in his role as leader of the Economic Recovery Advisory Board. To the extent that these reports are accurate, we view this as a real negative in terms of the open mindedness and effectiveness of the Obama economic team.

On September 27th we sent a note to our clients entitled, “Eye on Leadership: Volcker as Bailout Czar.” In that note we made the case that the 6’7 foot Volcker should be appointed as the Bailout Czar. Our summary view on Volcker was as follows:

“As we have said repeatedly, facts don’t lie, people do. And the facts in regard to Volcker’s ability to manage through a prior fiscal crisis with integrity and against popular opinion speak for themselves. Volcker is rightfully credited with ending the United States’ stagflation crisis of the 1970s. Chairman Volcker abandoned interest rate targeting and adopted policy to limit the growth of the money supply. His policies led to a sharp recession and were widely unpopular, but inflation which peaked at 13.5% in 1981 was 3.2% by 1983. Volcker was decisive, unpopular, but ultimately more right than any economic leader has ever been.”

Bush and Company did not tap Volcker for the position of Bailout Czar as we recommended, but President Obama did wisely bring in Volcker to head the Economic Recovery Advisory Board, noted above, whose goal is to provide outside and unbiased advice to the White House on this economic recovery plan.

Having one of the most successful and knowledgeable successful central bankers providing input and advice can only help President Obama and his economic team; not accepting his input will likely detract from any policy recommendations. Additionally, to the extent that these reports are accurate, they, on the margin, call into question the President’s ability to keep egos in check within his White House, specifically in the way of Larry Summers. We hope Summers et al will fully engage Volcker in the coming months and that President Obama will realize the value of Volcker’s experience.

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