Former Fed Chair Speaks Out

Paul Krugman’s reply to my post on Allan Meltzer’s and Paul Volcker’s critiques of monetary policy failed to mention what Paul Volcker has been saying. Yet Volcker’s views are important, especially since, as Krugman points out, he “deserves immense respect for past achievements.”

In his recent Economic Club of New York speech (which has been under-reported and deserves to be read carefully), Volcker argues that the “Beneficial effects of the actual and potential monetization of public and private debt, the essence of the QE program, appear limited and diminishing over time.  The old ‘pushing on a string’ analogy is relevant.  The risks of encouraging speculative distortions and the inflationary potential of the current approach plainly deserve attention.  All of this has given rise to debate within the Federal Reserve itself.  In that debate, I trust sight is not lost of the merits – economically and politically – of an ultimate return to a more orthodox central banking approach.”

Like many others, Volcker is pointing to a two types of risk:  speculative distortions and inflationary potential.  Inflation, even if down the road, is not the only problem. There are already distortions caused by the unprecedented interventions in the mortgage market, the Treasury bond market and the inter-bank loan market, including the multi-year zero interest rate administered by the Fed.

It is also important to note, as I did in my earlier post, that Volcker is critical of the Fed’s dual mandate, which he says is “operationally confusing and ultimately illusory: operationally confusing in breeding incessant debate in the Fed and the markets about which way should policy lean month-to-month or quarter-to-quarter with minute inspection of every passing statistic; illusory in the sense it implies a trade-off between economic growth and price stability, a concept that I thought had long ago been refuted not just by Nobel prize winners but by experience.”

During his chairmanship of the Fed, Volcker found a way to deal with this dual mandate and still run a reasonably predictable monetary policy.  More recently the Fed has used the dual mandate to rationalize a less predictable and more interventionist monetary policy.

It’s unusual for former central bankers to speak about current monetary policy, yet Volcker is not the only one to do so. In a recent CNBC interview, Alan Greenspan also raised concerns about current policy saying:   “The sooner we come to grips with this excessive level of assets on the balance sheet of the Federal Reserve, which everyone agrees is excessive, the better.” and “The issue is not only a question of when we taper down, but when do we turn?  And I think that the markets may not give us all of the leeway we would like to do that.”

About John B. Taylor 117 Articles

Affiliation: Stanford University

John B. Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University and the Bowen H. and Janice Arthur McCoy Senior Fellow at the Hoover Institution. He formerly served as the director of the Stanford Institute for Economic Policy Research, where he is now a senior fellow, and he was founding director of Stanford's Introductory Economics Center.

Taylor’s academic fields of expertise are macroeconomics, monetary economics, and international economics. He is known for his research on the foundations of modern monetary theory and policy, which has been applied by central banks and financial market analysts around the world. He has an active interest in public policy. Taylor is currently a member of the California Governor's Council of Economic Advisors, where he also previously served from 1996 to 1998. In the past, he served as senior economist on the President's Council of Economic Advisers from 1976 to 1977, as a member of the President's Council of Economic Advisers from 1989 to 1991. He was also a member of the Congressional Budget Office's Panel of Economic Advisers from 1995 to 2001.

For four years from 2001 to 2005, Taylor served as Under Secretary of Treasury for International Affairs where he was responsible for U.S. policies in international finance, which includes currency markets, trade in financial services, foreign investment, international debt and development, and oversight of the International Monetary Fund and the World Bank. He was also responsible for coordinating financial policy with the G-7 countries, was chair of the working party on international macroeconomics at the OECD, and was a member of the Board of the Overseas Private Investment Corporation. His book Global Financial Warriors: The Untold Story of International Finance in the Post-9/11 World chronicles his years as head of the international division at Treasury.

Taylor was awarded the Alexander Hamilton Award for his overall leadership in international finance at the U.S. Treasury. He was also awarded the Treasury Distinguished Service Award for designing and implementing the currency reforms in Iraq, and the Medal of the Republic of Uruguay for his work in resolving the 2002 financial crisis. In 2005, he was awarded the George P. Shultz Distinguished Public Service Award. Taylor has also won many teaching awards; he was awarded the Hoagland Prize for excellence in undergraduate teaching and the Rhodes Prize for his high teaching ratings in Stanford's introductory economics course. He also received a Guggenheim Fellowship for his research, and he is a fellow of the American Academy of Arts and Sciences and the Econometric Society; he formerly served as vice president of the American Economic Association.

Before joining the Stanford faculty in 1984, Taylor held positions as professor of economics at Princeton University and Columbia University. Taylor received a B.A. in economics summa cum laude from Princeton University in 1968 and a Ph.D. in economics from Stanford University in 1973.

Visit: John Taylor's Page, Blog

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