On Inflation, We Live in The House that Volcker Built

by: Barry Ritholtz

The King Report, an institutional commentary, recounted a fascinating discussion that took place at Bloomberg's HQ in NY on Monday night. A panel of ex-NY Fed Presidents (Paul Volcker, Gerald Corrigan, William
McDonough and Anthony Solomon) held a panel discussion on the risks to the US economy. The panel chair was current NY Fed President Tim Geithner.

Here are a few comments that Bill King was kind enough to pass along:

"Volcker and Corrigan warned about inflation.

Gerald Corrigan on our current structutral issues: “Once the genie [inflation] is out of the bottle, it is very, very difficult and expensive to put it back in the bottle...The
U.S. savings rate is virtually zero. It brings with it some potential
of very serious problems down the road, as far as the well-being of our

While Greenspan gets most of the credit, the reality is we have been living in the house that Volcker built. Easy Al has frittered away much of the solidity of that Anti-Inflation structure. 

Here are Volcker's comments:

Paul Volcker: “I am a little bit more worried about inflation…it is kind of creeping up, and I am impressed by the degree of pressure, if that is the right word, psychological pressure, political pressure, there is not to do anything about it.”

Volcker added, “A lot of people out there on Wall Street, and on Main Street, are operating on the assumption that nothing very startling will happen in terms of restraint…But once people are convinced that that’s the case, it can creep up and the more it creeps on you the more difficult it becomes to do something about it.”

Volcker also criticized the LTCM bailout. “I expressed certain reservations about that particular operation at the time and I hold steadfast to my reservations.”

Paul also takes a swipe at the contemporary Fed for its penchant to warble. “I do think actions speak louder than words and the words should as little as possible confuse things. The market ought to make up its own mind once in a while and eventually it will. I don’t know how much they need to be spoon-fed, so to speak.”

Mr. Volcker, God bless him, ridicules contemporary central bank
& Street sophistry:
“We live in this peculiar world where 3 percent inflation is stability but a half percent decline in the price index is deflation. I am not quite up with modern nomenclature.”

Great stuff. Thanks, Bill.

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