Paul Volcker at Bloomberg HQ

The King Report, an institutional commentary, recounted a fascinating discussion that took place at Bloomberg’s HQ in NY on Monday night. A panel of ex-NY Fed Presidents (Paul Volcker, Gerald Corrigan, William
McDonough and Anthony Solomon) held a panel discussion on the risks to the US economy. The panel chair was current NY
Fed President Tim Geithner.

Here are a few comments that Bill King was kind enough to pass along:

"Volcker and Corrigan warned about inflation.

Gerald Corrigan on our current structutral issues: “Once the genie [inflation] is out of the bottle, it is very, very difficult and expensive to put it back in the bottle…The
U.S. savings rate is virtually zero. It brings with it some potential
of very serious problems down the road, as far as the well-being of our
citizens.”

While Greenspan gets most of the credit, the reality is we have been living in the house that Volcker built. Easy Al has frittered away much of the solidity of that Anti-Inflation structure. 

Here are Volcker’s comments:

Paul Volcker: “I am a little bit more worried about inflation…it is kind of creeping up, and I am impressed by the degree of pressure, if that is the right word, psychological pressure, political pressure, there is not to do anything about it.”

Volcker added, “A lot of people out there on Wall Street, and on Main Street, are operating on the assumption that nothing very startling will happen in terms of restraint…But once people are convinced that that’s the case, it can creep up and the more it creeps on you the more difficult it becomes to do something about it.”

Volcker also criticized the LTCM bailout. “I expressed certain
reservations about that particular operation at the time and I hold
steadfast to my reservations.”

Paul also takes a swipe at the contemporary Fed for its penchant to
warble. “I do think actions speak louder than words and the words
should as little as possible confuse things. The market ought to make
up its own mind once in a while and eventually it will. I don’t know
how much they need to be spoon-fed, so to speak.”

Mr. Volcker, God bless him, ridicules contemporary central bank
& Street sophistry:
“We live in this peculiar world where 3 percent
inflation is stability but a half percent decline in the price index is
deflation. I am not quite up with modern nomenclature.”

Great stuff. Thanks, Bill.

>

Source:
The King Report
Bill King
M. Ramsey King Securities, Inc.
Tuesday September 26, 2006 – Issue 3482 “Independent View of the News”
http://www.mramseyking.com/thekingreport.html

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What's been said:

Discussions found on the web:
  1. DKH commented on Sep 28

    I don’t know why you’re giving credit to The King Report. The full story is available on Bloomberg.com The event was, incidentally, sponsored by the Woman’s Economic Forum.

  2. jj commented on Sep 28

    while Volcker’s legacy has been routinely louded , many people still blame the Crash of 1987 , in part , on his rate increases ……. it’s always easy for him to be a critic , maybe his record should be inspected with greater focus

  3. Craig commented on Sep 28

    LOL!!!

    In over 20 years I guarantee Volker’s record has been “inspected” perhaps more than any other.
    Hindsight being 20/20 and all.

    Instead, perhaps we should study the economy of that day and the levels of inflation present then and why, and then apply what we learn to today.

  4. rm commented on Sep 28

    maybe Greenspan shouldn’t have cut rates post crash 1987 and save Volcker’s legacy …… or not cut rates as LTCM almost brought the system down in 1998

  5. re commented on Sep 28

    The beginning of the $ drop from all-time highs vs. Pound and Yen and DM started in 1985 during Volcker’s tenure and we’ve never recovered

  6. Mike commented on Sep 28

    It seems that the most used argument for stocks being so undervalued now is that interest rates have come down and everyone and their grandma uses some form of DCF analysis to arrive at this conclusion. But it seems this is a terrible model to use at inflection points where the bond market is actually forecasting a recession. Whenever yields go down and all other things remain constant, the DCF model will show stocks are more “undervalued”. But what if the bond market is right and we are going into recession. Then everytime the bond market forecasts recession the DCF model will signal that stocks are more undervalued. I guess the workaround is to reduce growth estimates, but analysts seem to think everything always grows. Anyway, that was the idea I was kicking around last night and wanted to voice it and get some feedback. I am by no means the be all, end all expert on this.

  7. ss23 commented on Sep 28

    what is bet shorting thing out there…qqqq or spy puts.. or just buy short proshare funds. can anyone help?

  8. jj commented on Sep 28

    QQQQ’s have a higher beta than DIA’s or SPY’s …. you need to determine beta-adjusted $ amount when you short , and your risk tolerance w/ stops …….you may want to short QQQQ’s vs. SPY or vs. DIA ….. and you should dynamically adjust positions as they move , long or short , Vega-like

  9. Eclectic commented on Sep 28

    Volcker understood a simple principle:

    The integrity of the currency is an absolute requirement of a healthy economy.

    My estimation of Volcker is that he provided what I consider to be a perfect adjunct to Keynesianism. That is; Volcker answered the question: How do you ‘recover’ from a Keynesian ‘recovery?’

    An economic system in which Keynesianism and Volckerism are combined answers the question: What would be a perfect approach to macroeconomic control?

    Keynes, genius that he was, in my opinion had one serious failing… he had the notion that currency should have a quite substantial carrying cost, and, consequently, he was willing to sustain higher levels of inflation than the mere levels required to trigger unrealistic expectations of future inflation within the public.

    This was because he felt that stationary capital was self-sustaining and that placing a cost on it was necessary to make it invest itself… He liked the notion of capital destruction in order that capital creation would result. I suppose it came from his leftist tendencies to favor labor over capital.

    However, labor ‘is’ c-u-r-r-e-n-c-y, and therefore if you destabilize the currency, you also destabilize the basis for its exchange, labor, and thus you destroy labor’s capacity to store the ‘wealth’ some of you have been speaking about.

    Keynes rightly understood that there are occasions in human events when it is necessary to destroy the wealth of stored labor, in order to stimulate the requirement to generate additional wealth. His problem was that, politically, he didn’t mind if the destruction continued indefinately. He didn’t mind if capital was continuously applied and simultaneously destroyed without the creation of wealth as a natural byproduct. I don’t think he liked ‘wealth’ in the traditional sense.

    Volckerism, in my opinion, provides a recognition that the valid tools of Keynesianism (which are unavoidably needed in random economic times) must be contained and controlled during the times they are not needed.

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