March 2, 2019


Other People's Blood: On Paul Volcker (TIM BARKER, February 26, 2019,  n+1)

IF SOMEONE WERE TO MAKE a movie about neoliberalism, there would need to be a starring role for the character of Paul Volcker. As chair of the Federal Reserve from 1979 to 1987, Volcker was the most powerful central banker in the world. These were the years when the industrial workers movement was defeated in the United States and United Kingdom, and third world debt crises exploded. Both of these owe something to Volcker. On October 6, 1979, after an unscheduled meeting of the Fed's Open Market Committee, Volcker announced that he would start limiting the growth of the nation's money supply. This would be accomplished by limiting the growth of bank reserves, which the Fed influenced by buying and selling government securities to member banks. As money became more scarce, banks would raise interest rates, limiting the amount of liquidity available in the overall economy. Though the interest rates were a result of Fed policy, the money supply target let Volcker avoid the politically explosive appearance of directly raising rates himself. The experiment--known as the Volcker Shock--lasted until 1982, inducing what remains the worst unemployment since the Great Depression and finally ending the inflation that had troubled the world economy since the late 1960s. To catalog all the results of the Volcker Shock--shuttered factories, broken unions, dizzying financialization--is to describe the whirlwind we are still reaping in 2019.

At the height (or nadir) of the Volcker Shock, benchmark interest rates were over 20 percent--and worse if you had bad credit. The exorbitant cost of borrowing put tens of thousands of firms out of business, and led to twenty-two months of negative growth. In December 1982, unemployment was at 10.8 percent--closer to 20 percent if you include workers who wanted jobs but had stopped looking, and underemployed workers who could not find steady full-time work. In absolute terms, twelve million Americans were unemployed that month, plus another thirteen million "discouraged" and underemployed.

The nation's industrial belt was the hardest hit. Ninety percent of job losses occurred in mining, construction, and manufacturing. It was costly for businesses to pay their debts and borrow money to invest, while a strong dollar made American exports even less competitive internationally. In places like Flint, Michigan and Youngstown, Ohio, more than one in five workers was unemployed. In Akron, the commercial blood bank reduced the prices it would pay by 20 percent due to the glut of laid-off tireworkers lining up to bleed. In the area around Pittsburgh, suicide rates and alcoholism soared, while residents competed for spots in homeless shelters. The unemployment rates for African-Americans were worse, peaking in early 1983 at 21.2 percent (up from around 12 percent--already a crisis--in 1979).

Those who praise Volcker like to say he "broke the back" of inflation. Nancy Teeters, the lone dissenter on the Fed Board of Governors, had a different metaphor: "I told them, 'You are pulling the financial fabric of this country so tight that it's going to rip. You should understand that once you tear a piece of fabric, it's very difficult, almost impossible, to put it back together again." (Teeters, also the first woman on the Fed board, told journalist William Greider that "None of these guys has ever sewn anything in his life.") Fabric or backbone: both images convey violence. In any case, a price index doesn't have a spine or a seam; the broken bodies and rent garments of the early 1980s belonged to people. Reagan economic adviser Michael Mussa was nearer the truth when he said that "to establish its credibility, the Federal Reserve had to demonstrate its willingness to spill blood, lots of blood, other people's blood."

What the Fed failed to understand most was that the fabric it tore up was what had created inflationary pressure and that it would indeed not be sewn back together again.  The tragedy is that every incoming Fed chairman--except Janet Yellen, bless her soul--felt compelled to prove their hawkish bona fides and caused economic slowdowns by hiking beyond what the market could bear. Thankfully, Jerome Powell seems to have spooked himself sufficiently to end his needless hiking.

Posted by at March 2, 2019 8:00 AM