INTERVIEW, Page 48ADVICE FROM MR. CHAIRMANPAUL VOLCKER, who helped whip inflation as America's top moneymanunder two Presidents, talks about the deficit, power and public service
By Lawrence Malkin, Paul Volcker
For eight years, as chairman of the Federal Reserve Board, Paul
Volcker was perhaps the second most powerful man in Washington.
There were no doubt times, as he squeezed the money supply and cost
people jobs in his battle against double-digit inflation, when he
was also one of the most unpopular. Volcker, 61, devoted more than
three decades to public service; his first appointment after
leaving Government in 1987 was as unpaid chairman of the National
Commission on the Public Service, a private group trying to improve
the lot of the nation's civil servants. Now, as chairman of the New
York City investment bank James D. Wolfensohn Inc., Volcker is
making big money for the first time in his life. With
Administrations changing in Washington, Volcker sat in the study
of his Manhattan apartment for a TIME interview with author
Lawrence Malkin.
Q. Some of your devotion to public service comes from your
father's career as city manager of Teaneck, N.J. What ideas did he
pass on to you?
A. He did spend his whole life in the public service, and I
suppose the impression I had as a kid was that he was doing
something that, in the cliche of the day, "made a difference." When
he took over, the town was on the verge of bankruptcy, and it was
refinanced. And within a few years it had an A-1 credit rating.
Q. You stuck to public service when you could have made
millions in private life as a banker or a trader.
A. Yeah, but trading for the Fed is a little different. You've
got all the cards when you trade for the Fed. But I easily could
have gone to law school. My indecision was resolved for me by
getting a larger fellowship at what is now the Kennedy School ((of
Government at Harvard)). And I often thought that if I'd gone to
law school, I would have been representing a bunch of banks before
the Federal Reserve Board in recent years instead of the opposite.
Q. You could have spent your life very comfortably as a senior
Fed economist.
A. It wouldn't be much fun, though.
Q. People tend to forget that the astronauts went into space
on Government paychecks. Do we get the "right stuff" in Government
now?
A. I obviously have some doubts about it, and that's why we
have this Commission on the Public Service. The attitude toward
federal service has certainly changed. It's a matter of psychology
and prestige. A feeling that civil servants get hammered by the
political process, beginning with the last couple of Presidents.
And after a while, you have enough people swearing at you, and you
don't think it's a very promising career. Salaries are of some
importance, ((but)) when you're talking about the federal civil
service, this process of layering the career people with more and
more political people has probably reached the point where it is
quite important in discouraging somebody who someday wants to have
a really responsible job: Why should I go into the civil service
when I know I'm going to be truncated at a pretty low level?
Q. The Reagan Administration argued that the best and brightest
should not be in Government but in the private sector creating
wealth.
A. It seems to me the argument falls on its face. Just pick up
any newspaper, on any subject. You have a great problem with the
space program. You've got problems with AIDS. You've got problems
with savings and loans. Now they're not all going to be rescued or
prevented ((from failing)) just by having a more effective civil
service. But to say that you can run the Government without any
continuity, without any background, without any expertise, I think,
logically is deficient.
Q. Do some of these problems arise from bad Government?
A. Just take the savings and loan thing, which I know something
about. The absence of a strong spirit of professionalism and
independence in the Home Loan Bank System and in the FSLIC ((which
insures S and L depositors)) certainly had something to do with the
weaknesses of the supervision and the regulatory effort. You can
argue that's all great -- that we gave the S and Ls all this
opportunity to go out and do it in the interest of entrepreneurship
and a bright new financial world. But I think we've lost a little
sense of balance. Hey, look at the Pentagon, which spends $300
billion a year. Are they doing a good job? And they're up against
all these very sophisticated, aggressive business people. Are the
people making those decisions getting the best professional advice?
Why do we seem to make so many mistakes on procurement?
Q. Defeating inflation is generally regarded as the crown of
your public career. How did you feel taking over the Fed in 1979,
facing terrible economic problems?
A. In a way that's easier. There was a perception that things
were going from bad to worse on the inflation side and that
something ought to be done. The ((Carter)) Administration had got
deeply concerned. They said to me they were scared of this
exploding inflation and were willing to stand still for stronger
measures than would ordinarily be the case. And that is a great
advantage. If you can walk into a situation that is felt to be so
severely out of kilter, you have greater freedom of action.
Q. Some say the Fed adopted monetarism and decided to target
control of the nation's money supply in order to keep hands off
interest rates and duck the inevitable political criticism as rates
rose.
A. I don't think that's quite fair. Interest rates went up much
further than I would have thought. But when the Federal Reserve
System as a whole got the bit in their teeth, they wanted to carry
out the monetarist doctrine to its fullest extent. We got pushed
into an even more hands-off stance than I personally would have
suggested in the beginning. But we really didn't go out of our way
to try to moderate the rise in rates, because everybody got all
caught up with this feeling that we wanted to demonstrate
credibility and have some favorable effects on people's
expectations ((that inflation would end)).
Q. High interest rates cost millions of people their jobs or
hurt their businesses. What do you say to those people now?
A. That to some degree the length and strength of the present
expansion, the fact that we've gone as far as we have with as
little inflation as we've had -- although I'm quite worried about
the inflation rate now -- is not unrelated to what we went through
early in the decade.
Q. What should the President expect from the Fed, and what
should the Fed expect from the President?
A. I'm tempted to say silence from both sides. But, you know,
so much of that depends upon personal relationships. I certainly
think they owe each other a willingness to communicate and explain
what they're doing on both sides. I do think that, under our
system, in monetary policy the Federal Reserve has to go off and
in the end make its own decisions.
Q. Jimmy Carter barely mentions you in his memoirs, which seems
strange because he appointed you. Did you get the support from him
you wanted?
A. What was remarkable is how little criticism ((of the Fed))
he had even in the midst of the election campaign. At one point he
made some comments, which weren't all that devastating, about why
the Federal Reserve didn't have to be as monetarist as they in fact
were. And Reagan at the same time was criticizing us for being too
easy. You know, some Democrats think we lost the election for Jimmy
Carter. I've asked him about that. He never thought we were a net
bonus to him. But I don't think he blames us for losing the
election. I have great respect for the fact that he did not take
the opportunity to criticize us more than he did. That changed a
bit with some of the people around Mr. Reagan.
Q. Did you discuss this with President Reagan?
A. No, we didn't have much contact. I mean, we had increasingly
less as the years passed. I don't think it was a very good idea,
but I didn't see much to do about it. I never considered our
give-and-take terribly productive.
Q. Do you think he understood what you were trying to do?
A. Not fully, no, because he was operating at a different level
in some sense. You know, he had a few notions about what he would
consider supply-side economics, although he only seemed to learn
them during the election campaign in 1980. You've heard this a
million times from people writing memoirs: it's a little difficult
to engage him in a substantive debate. He had a few relatively
simple and straightforward ideas. And in fact I didn't see him much
as the second term progressed. ((Chief of staff)) Don Regan kept
saying, "You've got to see him much more frequently. I'll arrange
it." But he never did. When I saw him, it was probably as often as
not at my initiative. But I didn't feel very comfortable about
that. The President was really quite supportive, particularly
given the pressures that he was under from his own people. He had
some basic instinct that he didn't like inflation, which was a
great help to us. He wasn't necessarily enthusiastic in his
support, but he wasn't heavily critical.
Q. The main attacks came from the supply-siders. They said
Volcker screwed up their policy.
A. Some of the more extreme people are totally unrealistic.
They claim that they had some wonderful scenario in their mind that
inflation was going to come down gradually, not too much and not
too little, and everything was going to come out just great eight
years later. Things don't work in that orderly a fashion. They
ought to be happy that, from their standpoint politically,
everything came out beautifully. They took their lumps in the first
couple of years ((with a recession)) and by the 1984 election
everything was going fine. Now they're rednecked about being blamed
for the budget deficit.
Q. How did we fall into the habit of foreign borrowing to cover
our deficits?
A. When I had some analyses presented to me in 1983 that showed
a current account deficit rising up toward $100 billion, I said
it's impossible, we can't borrow that much abroad. That's not going
to happen. But things continue in Government unless you feel a
crisis. In fact, we didn't have a crisis, so the deficit persisted.
Q. Here we've got another dilemma: a President who says "no new
taxes" and a budget deficit that many people say can't be closed
without them. How does the President get out of it?
A. I must confess what surprises me a bit about this ((the
deficit)) is how it has persisted with less trauma than I thought
was probable. Maybe it could persist another year or two years or
three years. I don't think it can persist forever. Well, if you
continue like this, I think we are gradually undercutting
productivity and growth for the American economy, and I think we're
undercutting our ability to lead in the world. It now is
demonstrably harder for us to propose something and expect the rest
of the world to follow. I think it is hard to expect other
countries to do what we would like them to do in the trade area,
in the economic policy area, as long as we stonewall them on what
they think we should do about the deficit -- and in fact what most
of us think we should do.
Q. Do you think that the danger to companies and banks that
have become overstretched in the Wall Street buyout boom might
inhibit the Fed from reining in the eco-nomy if it feels it has to?
A. Well, it may psychologically at some point. I think that's
unfortunate, because if you're inhibited now, you may be maximizing
the chances of a worse problem later on. The easiest time to deal
with inflation is before it gets started. Just to make the contrast
stark -- this is not a forecast -- if you had a choice between some
small increase in interest rates now that was going to control or
even lower inflation, and letting it get worse for two or three
years so we return to the situation we had in the early 1980s, then
these banks and companies would really be vulnerable. You've got
to do what you ought to do at a reasonably early time without
worrying too much about fragilities in the financial system, or you
may find out you've only got more fragilities.
Q. Walter Wriston, former chairman of Citicorp, used to call
you "the big nanny," and criticized you for "locking the wheels of
the world" when you attacked inflation. What did you make of that?
A. He was the head of our most aggressive bank, and he didn't
like surveillance by the regulatory authorities. That kind of
criticism irritates me. What right does anybody have to think that
inflation is going to go on? I don't think he was entitled to think
that we were going to keep it going.
Q. A number of people, including your wife, say you're happiest
when you're managing a crisis. Does that respond to something in
your character?
A. Frankly, I am not very good at planning things way in
advance, of doing great studies about what should be done over a
period of time, because it all seems very abstract. And I find it
very easy to be lazy unless something compelling comes along and
says, look, goddammit, you've got to act. And it's on your desk and
that's it. Then the adrenaline begins running. You're sitting there
in the Federal Reserve where you're supposed to do things that
aren't all that popular. And to the extent that you have an aura,
if that's the right word, of professionalism, it makes it all that
easier.
Q. Obviously public service is your lifeblood. Where do you go
