Soccer Dad

Economic villains and heroes

James Pethokoukis listed the 10 dopiest business and economic leaders of the year. I dont' know to what degree Alan Greenspan is responsible for the current crisis, but most of the criticisms seem right on target, especially #3:

The bailout trio. Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, and New York Federal Reserve President Timothy Geithner decided to let Lehman Brothers fail in September, triggering a global collapse of financial confidence, as well as wrecking the money and commercial paper markets. The move also led to massive hedge fund redemptions, which forced them to liquidate stocks. And don't forget the ever evolving $700 billion Paulson plan to bail out the banks. Buying assets one day, injecting capital the next. And the crisis rolls on ....

Fausta adds one.

Are there any heroes? Well Robert Samuelson names two: Paul Volcker and Ronald Reagan.

The subjugation of inflation was principally the accomplishment of two men: Paul Volcker and Ronald Reagan. If either had been absent, the story would have unfolded differently and, from our present perspective, less favorably. Reagan, president from 1981 to 1989, and Volcker, chairman of the Federal Reserve Board from 1979 to 1987, forged an accidental alliance that was largely unspoken, impersonal, and misunderstood. There was no particular personal chemistry between the men. Nor was there any explicit bargain--you do this, and I'll do that. Although Reagan supported Volcker, many officials in his administration openly criticized him. Even while the alliance flourished, it sometimes seemed a mirage.

But the alliance was genuine, a compact of conviction. Both men believed that high inflation was shredding the fabric of the economy and of American society. The country could not thrive if it persisted. Buttressed by these beliefs, they broke with the past. Each had a role to play, and each played it somewhat independently of the other.

Volcker took a sledgehammer to inflationary expectations. He raised interest rates, tightened credit, and triggered the most punishing economic slump since the 1930s. In December 1980, banks' "prime rate" (the loan rate for the worthiest business borrowers) hit a record 21.5 percent. Mortgage and bond rates rose in concert. By the summer of 1981, consumers had trouble borrowing for homes and cars. Many companies couldn't borrow for new investment. Industrial production dropped 12 percent from mid-1981 until late 1982. In many industries, declines were steeper. In autos, it was 34 percent (from June 1981 to January 1982), and in steel it was 56 percent (from August 1981 to December 1982). By 1982 the number of business failures had tripled from 1979. Construction starts of new homes in 1982 were 40 percent below the 1979 level. Worse, unemployment exploded. By late 1982, it was 10.8 percent, which remains a post-World War II record.

Reagan was resolute in the face of all this. He did not back down and trusted Volcker. Volcker's back and will play a role in the Obama administration. (So will Timothy Geithner.) Inflation undercut consumer confidence. As a result we've seen a tremendous economic expansion.over the past 25 years.

With the current economic crisis, consumer confidence is taking a big hit. Though the cause or the crisis is different, will Volcker know how to fix things like he did last time? Will President Obama listen regardless of the political cost?