Dark Skinny

Been looking into the past on this one and the different policies and the routes taken by both Ben Bernanke and Paul Volcker to remedy their respective periods of similar US stagflation could not really be more different. Perhaps it is best - for the sake of  comparison and history - that we look at the first earlier crisis, as it was in 1979, when Volcker was made Fed Chairman within the later stages of the Carter administration. Then we can simply bring history up to date and compare it to Ben Bernanke’s ongoing  Bailout policies, best referred to as The Ad Hoc Helicopter Play.

In my readings of Paul Volcker’s life and history - here is a very frugal man, first and foremost a family man, a fearless economic guardsman who loves his nation and therefore plays no side - an open man who, at different periods in his life, has been both reviled and revered. At the time of his appointment as Fed Chairman in 1979, Volcker was not a rich man - due to the heavy, necessary and ongoing medical expenses incurred for his son,  who had cerebral palsy. On his appointment in 1979, he had a small apartment in Manhattan, very sparsely furnished by all accounts, and perhaps best illustrating one of his most closely held tenets - that America should save more and consume less. And he still lives in that apartment today. When people who know Paul Volcker talk about him, the word integrity is always upfront and present. Paul Volcker, with his 6′8″ frame, is a mountain of integrity, inspiration and influence and he is still regarded as the greatest inflation fighter of our times. He was recently given the Chair to the President’s Economic Recovery Council.

Paul Volcker, in the stagflation of 1979, took a surprising economic route to quell this economic Kraken - he cut off the money supply, deliberately choking off production of the dollar - much to the horror and clamour of America’s Unions and Wall Street. Financial institutions were allowed to fall - he gave few bail-outs and there were strikes, there were even mass demonstrations within his own office, and as his rescue policies bitterly took hold - unemployment and inflation rose to high levels. But Volcker persisted with his grim policies and his mission until eventually, during Reagan’s Presidency - and after four years, the recession was defeated.  Paul Volcker didn’t waste time pandering to market confidence using soft economic plays such as tax-cuts and supply-side protectionist economics, and he certainly didn’t try to bribe the same with massive bailouts to desperately recapture trust again in a failing and rebellious financial system. He simply set the policies, spoke softly and waited patiently. And undoubtedly, he did use a big economic stick to see it all through.

So what can we say about Ben Bernanke’s record? This is his first economic crisis, which is still alive, well  and very much kicking ass, despite massive Wall Street Bailouts, despite ignoring the US Fiscal Deficit and forcing low interest rates to dangerously low levels, thus endangering long term Treasury interest rates. Bernanke is an arch Monetarist who, along with all his staunch Friedmanite following, deeply believes that you can control inflation - and therefore the US economy - through monetary control mechanisms, which is why he has been pumping out vast amounts of paper dollars to monetize or dollarize America’s debt. But is this strategy working? I’ve watched several of the grillings that Ron Paul has delivered to Bernanke during sessions of the Economic Oversight Committee, and I’ve watched as Bernanke gave hedged, incomplete answers, evading - so much like a slippery, wet, weasel - always evading Ron Pauls questions with indirect and meaningless verbal meanderings and Fed stock answers. The man has little imagination - and although he has fervently studied The Great Depression of ‘29 - it seems to me that he learnt little from this pursuit.  Plainly, perhaps, Bernanke’s economic rescue route - a much more secretive, softer and seductive affair than Volcker’s grimmer, big-stick stagflation play - while working with tax-payer’s money to actually preserve all those inefficient, risk-promoting financial institutions that we all know so well now, whilst systematically denuding the dollar of all international respect, seems to be working little magic towards a US economic recovery.

The differences in perspectives between Paul Volcker’s economic views (I’ve recently read that Paul Volcker has a sneaking admiration for the Austrian School of Economics) and Ben Bernanke’s helicopter operations regarding a national economic rescue policy couldn’t be wider. But it is my simple hope and my wish that Paul Volcker’s brave economics will eventually dominate both Ben Bernanke’s narrow monetarist views, as well as the suspicious economic opinions of both Larry Summers and Bernanke’s other staunch ally and ex-New York Fed boss - Timothy Geithner. There will be great differences of opinion here.

Like Yin and Yang.