Paul Volcker

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At Barack Obama’s news conference this morning, he declared: “At this defining moment for our nation, the old ways of thinking and acting just won’t do. We are called to seek fresh thinking and bold new ideas.” So it was striking to see that the person standing next to him was 81-year-old Paul Volcker, a figure from the Carter and Reagan eras. (It was also striking to see anyone tall enough to tower over Obama the way Volcker did.)

The President-elect stressed important Volcker’s counsel was in helping him get elected: “Paul has been by my side throughout this campaign, providing a deep understanding of financial markets, extensive experience managing economic crises, and keen insight into the global nature of this particular crisis.” As for the significance of Obama’s appointing the former Fed chief to head his new Economic Recovery Advisory Board, Justin Fox suggests:

Given Volcker’s history, it is awfully interesting.

In 1979, inflation was running in double digits and bond investors had lost all confidence in Washington’s ability to get it under control. By grudgingly appointing Volcker, then the president of the Federal Reserve Bank of New York (the job that Treasury-Secretary-in-waiting Tim Geithner holds now), Carter reassured markets and, it turned out, put monetary policy in the hands of somebody who was willing to sacrifice just about anything–including Carter’s job and those of millions of other Americans–to get inflation under control. In Greider’s telling, it was the beginning of an era where Wall Street called all the shots.

That era now seems to have come to an end in another period of “political panic and financial distress,” and yet here is Paul Volcker again. He’s been advising Obama for months. There was even talk that he might get the post of Treasury Secretary. What does his presence in the Obama camp mean?

Obviously the appointment is meant partly, just as it was in 1979, to reassure markets. Somebody investors trust is, if not in charge, at least standing at the President’s side.

But I’d like to think there is more to it than that. Volcker is not an economist, but he seems to have internalized far better than most economics Ph.Ds the lesson that there is no free lunch. That’s my interpretation–a more generous one than Greider’s–of Volcker’s brutal stand against inflation from 1979 through 1981. In the 1960s many economists had come to believe that inflating the currency was a simple and relatively safe way to keep the unemployment rate down–that is, a free lunch. Volcker put an end to that failed experiment.