Volcker legacy stands tall

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Even if he weren’t 6-foot-7, Paul Volcker would be a towering figure.

There is, of course, his tenure as Federal Reserve chairman from 1979-87, when some of his toughest anti-inflation policies produced demonstrations in the streets of Washington. But there is also his work in other fields, including helping track the assets of Holocaust victims, investigating corruption of United Nations programs and, most recently, chairing President Barack Obama’s Economic Recovery Advisory Board. (The board’s term expired Feb. 6, 2011.)

The latter gave him a chance to grouse about the U.S. banking industry’s role in the recession. That may seem surprising given that his career development included multiple stints at Chase Manhattan. But Volcker has never been known to shrink from a battle of philosophical wills.

Last week, at a dinner honoring him at Harvard’s Kennedy School of Government for a life devoted to public service, Volcker seemed almost embarrassed when his introductory list of achievements took so much time. “Will you stop this?” he said with a laugh.

Up on the podium, he quipped that, busy as he may seem, at 83, time is taking its toll. “There’s a lot of things going on in this world, and I think, ‘If only I were 80 again,”’ he said.

If Alan Greenspan’s easy-money policies led to him being branded “the bubble man,” Volcker was an adamant “anti-bubble-ist” — often at the expense of being publicly pilloried. Faced with virulent inflation in the early 1980s, he hiked interest rates to unheard of levels. The prime rate topped out at 21.5 percent. The resultant recession was crippling.

Volcker stood firm. Prices were brought under control, but Volcker paid a personal one. In 1987, President Ronald Reagan declined to renominate him and picked Greenspan. Nevertheless, Volcker will forever be known as the man who brought inflation to its knees. He also gave the Fed a higher profile than it perhaps ever had before. Things like the federal funds rate were now being discussed in living rooms, not just academic conferences.

In his remarks last week, Volcker reflected on how the Fed has changed and how difficult public leadership is in today’s polarized world.

In his day, the Fed was noted for keeping its curtains closed. Dissent was voiced away from public view. And it kept Washington at arm’s-length — even the White House, lest political influence affect policy decisions. “I’m kind of a child of the Federal Reserve, and we like to stay away from presidents,” he said.

Perhaps the biggest challenge for policymakers today, he said, is a deeply distrustful public. “The lack of trust in our government is pervasive in this country,” he said. “There’s too much feeling that it’s not as effective as it should be.”

Clearly, Volcker remains an intellectual lion. Today, one of the hottest topics on Capitol Hill is the so-called Volcker Rule. The rule, which reins in speculative trading practices by banks, grew out of the economic advisory board Volcker chaired until earlier this year.

The proposal, whose details are still being ironed out, is a philosophical fit with Volcker’s long-term skepticism of banking deregulation. “We all know government is necessary,” he said last week. He once said the only financial innovation he admired was the ATM.

Not surprisingly, there are a great many financial industry lobbyists on Capitol Hill working hard to dull the Volcker Rule’s sharp edges. According to a recent story by Reuters, Goldman Sachs is “freaked out” by the regulation’s potential implications.

To observers like David Ellwood, the dean of the Kennedy School, it’s just another example of Volcker’s lifelong push to make sure regulation helps the public it’s meant to protect. “Deep in his heart beats a desire to make government better,” Ellwood said.