Nearly a decade ago, President Barack Obama gathered top members of his economic team at the White House to announce his most aggressive response to the financial crisis to date. No longer, Obama declared, would big banks be allowed to put “taxpayer money at risk” to orchestrate “proprietary trading operations for their own profit.”
The press conference was designed to signal an ideological left turn. Jackie Calmes at The New York Times described the administration “throwing a public punch at Wall Street” in order “to strike a more populist tone.” The Washington Post ruminated about a power shift away from finance-friendly Obama confidants Larry Summers and Timothy Geithner toward “legendary” former Federal Reserve Chairman Paul Volcker.
Obama himself put it bluntly: “We’re about to get into a big fight with the banks.”
It was a moment knotted with paradox and irony. Volcker ― a titan of the American financial establishment, a friend to billionaires and CEOs around the world ― was championing what would prove to be the most radical economic initiative of the Obama era.
The financial crisis of 2008 had exposed proprietary trading as a source of widespread abuse in American banking. Banks with powerful clients had access to extraordinary troves of confidential information, which could come in handy if those banks were to place bets of their own in securities markets. Such activity, Volcker wrote in his 2018 memoir, “practically invites malpractice.” Banks could wager billions of dollars at a time, bets that that would ultimately be dumped on the public if they backfired.
And so under “the Volcker Rule,” as Obama’s new plan became known, banks would be barred from trading securities for their own profit.
The Volcker Rule wasn’t just a banking reform. It was the final public act in one of the most influential American lives of the past century, and a symbol of the dominance that Volcker had come to exercise over the political imagination of the American elite.
Volcker, who died Sunday at the age of 92, served three presidents in the Treasury Department, enjoyed a prestigious tenure at Chase Manhattan Bank, taught at Princeton University, and oversaw an international commission to compensate Jewish families fleeced by Swiss banks during and after the Holocaust.
He is best-known for his work as Chairman of the Federal Reserve from 1979 to 1987, where he became a figure of reverence in both Wall Street and Washington for his crusade against inflation. But there is far more to Volcker’s legacy than the consumer price level. More than any other single individual, Volcker assembled the economic architecture that has guided the United States for the past four decades. He revolutionized the role of the Fed, and transformed the way economic power is wielded and distributed in American life.
Most important of all, he became a champion for a way of thinking about politics, democracy and power that came to dominate not only the social circles of business-class Republicans, but the leadership of the modern Democratic Party.
There is no more eloquent defense of this worldview than Volcker’s own lucid, engaging memoir, published near the end of his life. In it, Volcker presented two common threads to his time in public life: His own relentless pursuit of good government, and the nefarious influence of politics. In Volcker’s telling, politics continuously interfered with his carefully laid plans and those of other accomplished experts. The most pressing issue of our time, Volcker argued in 2018, was “the need to restore trust in the full range of our governmental processes” by removing from them the stain of politics.
He understood his career as a quest to live up to the standard set by his father ― the “nonpartisan,” “professional” city manager of Teaneck, New Jersey, who took on corrupt politicians and did what was right for his town. It was a scandal, Volcker maintained, that American culture had failed to bestow the same level of prestige upon government service that it grants to business and medicine.
Volcker was clear-eyed about the depth of elite failure, from the invasion of Iraq to the financial crisis to the high price of globalization paid by the American middle class.
“There has been a lack of attention for years to the need for effective governmental organizations staffed by talented, dedicated public servants,” he wrote. “The result has been too many breakdowns, too little efficiency, and, most critically, too much distrust of government itself.”
But he conceived of good government as essentially anti-ideological. By undervaluing government, Volcker argued, the United States had driven good, competent people out of the public sector, allowing the inherently corrupt world of politics ― a realm of special interest favor-trading, short-term electoral strategizing and delusional ideologues ― to control policymaking. The long-term solution? Reinvigorate a sense of public responsibility at educational institutions and restore the independence of public servants.
America no doubt needs better experts. The Trump administration is a rolling international laughingstock. Some of today’s most prominent public voices are the Iraq war boosters and Ebola panic-mongers of yesteryear. Volcker’s vision of a prestigious technocracy making the best decisions with the best data free from political meddling sounds relaxing as the United States careens from scandal to outrage.
But the bigger problem has to do with the nature of expertise itself. Big policy questions aren’t sterile scientific verdicts about complex information. Even with the best available data, they involve competing values ― choices between different futures that affect different populations in different ways.
Nowhere was this more evident than in Volcker’s tenure at the Fed, where he ruled over American money as a devastatingly effective class warrior.
When President Jimmy Carter appointed Volcker to the Fed in 1979, the country faced twin economic crises: raging inflation and painfully high unemployment. Volcker blamed the mess on the unwillingness of public officials to take politically unpopular actions over the previous two decades. After “years of compromise and flinching from a head-on attack,” Volcker writes, “it was time to act.”
Central banks had long managed inflation by adjusting interest rates ― the price of credit in the economy ― as a way to encourage or discourage bank lending and broader economic activity. More lending would put more money into the economy, boosting jobs and growth, but it could also put upward pressure on prices. Less bank lending would do the opposite. The key interest rate for the central bank is the federal funds rate ― which sets the price of loans that banks make to each other for short-term, stopgap purposes.
The federal funds rate spent most of the 1960s below 5%, and most of the 1970s below 7% (it has spent most of the 21st century below 1%). Volcker let it rise to over 19%. The result ― intentional and anticipated ― was a brutal recession. Unemployment climbed from about 6% when Volcker took office to a staggering 10.8%, still the highest level since the Great Depression.
Volcker’s recession reshaped American life. All over the country, farms went into foreclosure, unable to stay in business with the price of credit so high. The suicide rate among farmers in the upper midwest began to soar. Small- and mid-sized manufacturing companies went under, taking jobs with them, particularly jobs for black workers. By January 1983, the black unemployment rate had eclipsed 21% ― more than double the rate among white workers.
Eventually Volcker decided the economy had suffered enough and began reducing interest rates. But the world had changed. The smaller firms that went out of business were gone for good. Economic power was now more heavily concentrated in fewer corporate hands. And workers had taken a blow to bargaining power with corporate management from which they are yet to recover.
Inflation had, however, been tamed. There hasn’t been a serious, sustained increase in general consumer prices since Volcker left the Fed. But inflation was predominantly a problem for people who had savings ― and most people didn’t have much squirreled away, if anything. For most of the 1970s, rising wages generally kept pace with rising prices. Volcker had, in effect, wrested economic gains for a relatively small class of financial elites from the paychecks of millions of workers.
Just as important, he had also reinvented the Fed. Ever since the Great Depression, the Fed had served as a junior partner in the federal government’s economic policy team. For much of the 1930s and 1940s, it functioned by facilitating the demands of Congress and the administration ― keeping interest rates low to help accommodate ambitious public works projects and even more ambitious war spending. Even when it became formally independent of the Treasury Department in the 1950s, Fed chairmen were reluctant to operate at blatant cross-purposes with an administration. They’d consult with presidents, find common ground where they could, and where they could not, typically moderated their agenda in the face of presidential intimidation.
This was not Volcker’s method. Less than a year before Volcker took office, Carter signed the Humphrey-Hawkins Act, which gave the Fed a dual mandate to maximize both employment and price stability. Volcker essentially ignored the new law, choosing to focus exclusively on inflation, whatever the impact on jobs. He remained openly hostile to the dual mandate to the end of his life, insisting in his memoir that adding employment to the Fed’s duties causes “confusion.”
Meanwhile, Volcker’s model of administration has become an ideal, something economists and financial journalists praise as “central bank independence.”
Advocates of this independence cite the corruptions and insanities of politicians for support. Wouldn’t it be awful if Tea Party Congressmen voted on monetary policy? Living within the chaos of the Trump administration, it’s tempting to look back on what came before as a period of normalcy, to yearn for a time when smart people were in charge who knew how to get it right.
But four decades of experience with Volcker’s model does not exactly inspire confidence. The recession of the 1980s gave way to decades of wage stagnation, soaring economic inequality, a devastating financial crisis, and an anemic recovery. These were not just misfires from the experts, who maybe should have dialed up slightly higher or lower rates at different points in the business cycle. They were ideological decisions about how the fruits of American production would be distributed ― matters, fundamentally, of power. This is the arena in which democracy ― and not merely expert government ― must be dominant.
Ten years after Volcker’s appearance with Obama at the White House, it is hard to see the Volcker Rule as an important milestone. After a bitter fight in Congress, Volcker got his rule, but he did not introduce a new era of responsibility in American finance. Wells Fargo can’t stop breaking the law. JPMorgan Chase has racked up more than 50 fines and settlements since the financial crisis. Rather than collapsing, the financial system has settled into an equilibrium in which banks commit outrages, receive a ceremonial slap on the wrist, and move on to the next rip-off.
If, as Volcker believed, all of the good people have been driven out of government, they certainly didn’t land on Wall Street. Even the most elegant technocratic designs are no substitute for democratic accountability.