TIME: Almanac 1993/TIME Almanac 1993.iso/time/012389/01238900.014

Text File | 1992-09-23 | 13.8 KB | 290 lines

                                                                                INTERVIEW, Page 48

ADVICE FROM MR. CHAIRMAN

PAUL VOLCKER, who helped whip inflation as America's top
moneyman under 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 from here?

    A. Right where I am, I think.