Commentary and Dialog with Paul Volcker

By Volcker, Paul; Liesman, Steve et al. | Business Economics, July 2013 | Go to article overview

Commentary and Dialog with Paul Volcker

Volcker, Paul, Liesman, Steve, Simonson, Kenneth D., Business Economics

Editor's Note: When Paul Volcker was presented the NABE Lifetime Achievement Award for Public Policy, he was invited to share his views on public policy related to money and banking in an informal context. In addition to his own remarks, he responded to questions offered by Steve Liesman and Kenneth D. Simonson. What follows is an edited transcription of those views.

Business Economics (2013) 48,149-154.


Keywords: banking, monetary policy, too big to fail, international monetary system, regulation

It is really a special privilege and honor to be here to receive this inaugural award. It reminds me that 40 years ago, in 1973, I received another first award from NABE. That one happened to be from the New York Chapter, which was inaugurating an award in honor of William F. Butler, who was well-known to me because he was my boss at that time.

He was one of the leading bank economists at a time when bank economists were rather prestigious. It was after the war and the early postwar years, and the major banks were strongly in competition with each other. These banks each had sizable economics departments and pretty well-known economists as their leaders.

If you were a Bill Butler, you were a spokesman for the bank and an educator, but you also--which was not so usual--were part of the bank's management and had an influence on the bank's actual work and operations. It was, as I look back--this is an occasion for looking back a little bit--a high point for business economists and bank economists. As time passed, that became less usual. Banks decided that the economics departments might be expendable in times of great strain and stress.

When we got into the 1970s and things were in turmoil, you didn't hear so much about bank economists. But I think it is fair to say that that era is now past, and we are in an era where economics, people with economics training, and economics professionals are back. This is especially true in major financial institutions and other business institutions, where economists contribute importantly to the inevitable debate that goes on about economic policy.

There isn't any significant area of monetary, fiscal, or other economic policy you want to look at these days where large financial institutions or other business institutions don't have a legitimate concern, a legitimate point of view, as the people in this room help to direct policy into constructive avenues.

There was a period, as you know, when all of this was considered rather irrelevant, when there was a strong school of more abstract academic thinking that markets could take care of themselves, that government should be notable by its retreat from markets as much as possible and certainly not have an increased role in markets. You know the story: efficient markets and rational expectations, all the complications, all the brilliance of financial engineers, all the premium on trading, which arose very rapidly in the 1980s. At the end of the 1980s and into the 1990s, it was a different world.

Well, that confidence in finance and economics--that feeling that markets should and would take care of themselves--has, of course, evaporated in the midst of an unexpected financial crisis. The biggest crisis we've had in the economy and in financial markets in over 80 years. The fact that so few people anticipated anything like this situation six or eight months before it really got underway is a commentary on the state of economic analysis and theory. But I think we are going to learn something from this.

I have been struck by all the great uncertainties that exist in the current economy: budget problems as far as the eye can see, Federal Reserve balance sheets moving into uncharted waters, banks under great pressure, the rise of China, and international problems. However, when I looked at a sheet I received from a major financial institution giving the forecast of their economics department, what struck me was that--given the dissonance from all the uncertainties that we all know about in the economic future--I couldn't find one measure that moved more than two-tenths of a percent from this year's performance. …

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