Mon Feb 4th, 2008 at 01:58:55 AM EST
(Update note: I added more material to the discussion of what happened in the 1970s when Volcker was Fed chairman).
For the past few years, DailyKos is reportedly the most popularly read progressive political blog in the world. And on DailyKos, one "BondDad" has established a huge following for his posts on financial and economic matters, usually full of vivid graphs and concise explanations of events in the financial markets. Up until this past summer or autumn, "BondDad" presented his analysis from a perspective I fully agreed with: the U.S. economy was much weaker than it appeared to be because wages and earnings for the working and middle classes have stagnated since the 1970s, and a monstrous bubble of debt has been created to allow Americans to keep consuming despite their declining incomes.
But the past few months I have been increasingly distressed by BondDad’s postings, which have swung into alignment with Rubinomics – the Bill Clinton / Democratic Party version of “free trade’ “free market” economics which is unfortunately called “neo-liberalism.” Yesterday BondDad posted a diary reporting Barack Obama has been endorsed by former Federal Reserve Chairman Paul Volcker. BondDad cannot seem to say enough nice things about Volcker:
Volcker's actions in the early 1980s are the primary reason the country didn't fall into a period of rapidly escalating inflation in the early 1980s.
Volcker is one of the few economists who has correctly diagnosed the the central problem of the US economy.
Volcker has "been there and done that" in more ways then one. He is an accomplished economist with solid practical real-world experience.
This is an endorsement that carries a great deal of weight with the economic crowd.
In his epic Latin poem,The Aeneid, Virgil tells us that when Laocoon, the Trojan leader, awakened to find his soldiers dragging the massive Greek ruse into the city, he ran toward the city’s gates, screaming the warning “O wretched countrymen! What fury reigns? What more than madness has possess'd your brains? . . . Somewhat is sure design'd, by fraud or force. Trust not their presents, nor admit the horse.”
Consider this my Laocoonian scream.
If anything or anyone pleases “the economic crowd” at this point, the best thing to do is to take it or them, wrap them in a few hundred pounds of chain, and throw them into some very deep water. Then drop depth charges, just to be sure.
The “economic crowd” that BondDad is apparently now so keen to please is exactly the structure of power that must be demolished if we are to repair this broken, bleeding country of ours and get it moving forward again. BondDad’s “economic crowd” are the cruel-hearted bastards that told Mexico, Argentina, Brazil, and dozens of other countries in the 1980s and 1990s that it is better for schools and hospitals to close and for children to starve than to miss a few interest payments to the financiers and bankers of Wall Street, Switzerland, and the City of London.
BondDad’s “economic crowd” are the warped geniuses that showed Enron, Tyco, Adelphia, and MCI/Worldcom how to game the system and cook their books, then walked away with billions of dollars in commissions and fees when each one of those rotten messes collapsed.
BondDad’s “economic crowd” are the vicious little swine who are anxiously awaiting the next President of the United States to begin “saving” Social Security by establishing “private accounts.”
O wretched countrymen! What fury reigns? What more than madness has possess'd your brains?
Here’s the real story on Paul Volcker, in a somewhat lengthy but important history of the strategic financial movements and policies that have destroyed most of our real economy, The Financial Tsunami: The Financial Foundations of the American Century by William Engdahl:
In August 1979, to restore world “confidence” in the dollar, President Jimmy Carter . . . was forced by the big New York banks, led by David Rockefeller’s Chase Manhattan, to accept Paul Volcker, a protégé of Rockefeller’s from Chase Manhattan Bank, as new Chairman of the Federal Reserve with an open mandate to do what was necessary to save the dollar as reserve currency.
On taking office, Volcker bluntly announced, "the standard of living for the average American has to decline." He was Rockefeller’s hand-picked choice to save the New York financial markets and the dollar at the expense of the nation’s welfare.
In a 1988 book, Secrets of the Temple: How the Federal Reserve Runs the Country, William Grieder revealed how Volcker deliberately pushed the Unites States onto the path of having the economy increasingly under control of Wall Street. Under the Keynesian full-employment policies that the U.S. followed after emerging from World War 2, the Fed’s approach to controlling inflation was limited almost entirely to its manipulation of monetary aggregates. The longest-serving Fed chairman to date has been William McChesney Martin, Jr., who served from 1951 to 1970. His replacement, selected by Richard Nixon, was Arthur Burns, whose macroeconomic analysis had greatly influenced Milton Friedman’s work, as reflected in Friedman’s and co-author Anna Schwartz's massive tome A Monetary History of the United States, 1867–1960. The great irony is that under Burns, the Fed’s focus on inflation changed to a “cost-push” interpretation: the basic problem that needed to be addressed was the inflationary impact of increasing wages.
Yet further irony – Nixon believed he had lost the 1960 election because of the Fed’s monetary tightening, which caused a recession that year. When Nixon appointed Burns chairman, he made very clear to Burns that he expected the Fed to flow “easy credit” into the economy to pave the way for Nixon’s reelection in1972. When there were signs that Burns might resist, articles appeared in the U.S. media suggesting that new legislation was required to diminish the Fed’s power and authority. As a result, according to the Fed Board of Governors meeting minutes of November 1970, Burns believed that:
...prospects were dim for any easing of the cost-push inflation generated by union demands. However, the Federal Reserve could not do anything about those influences except to impose monetary restraint, and he did not believe the country was willing to accept for any long period an unemployment rate in the area of 6 percent.
It is in this context that Volcker first enters our notice, as Undersecretary of the Treasury for International Affairs. As Engdahl relates, in this position, Volcker played a key role in convincing Nixon to stave off the growing international crisis of confidence in the U.S. economy and the dollar by the simple expedient of changing the rules -- ending convertibility of the dollar into gold at the $35 an ounce established in the Bretton Woods agreement. This completelt destroyed the post-World War Two international monetary order, and it is arguably the first and most important step in financial deregulation, and creating the conditions in which financial derivatives and speculation could flourish. Adding to these problems, of course, was the burden of paying for the Vietnam War, which both Lyndon Johnson and Nixon tried to do by borrowing.
The 1973 Oil Embargo was the next nasty shock to the U.S. economy. Here, instead of beginning a serious national effort to find an alternative to an industrial economy based on fossil fuels, the policy became that of a “post-industrial” society, with secret arrangements made for the massive amounts of dollars being pumped into the Middle East and the Persian Gulf to be recycled back into the United States, creating a debt bubble that would paper over the reality of how the U.S. industrial economy was being wrecked. The specific “petro-dollar” agreements that accomplished this are covered by John Perkins in his book, Confessions of an Economic Hit Man.
These are not sound policies, at least, not if you’re interested in maintaining an industrial economy and preserving the post-war gains of the middle and working classes. By the late 1970s, the U.S. economy was beset with stagflation, a condition which mainstream economics had never thought possible. Probably because mainstream economics was still thinking in terms of a functioning industrial economy. So, when Volcker became Fed chairman in August 1979, a number of basic U.S. industries were in bad shape, particularly the bedrock industries: automobiles, steel, and machine tools. One of the Big Three car makers, Chrysler, was near bankruptcy. At the same time, the Hunt brothers had attempt to corner the market for silver, but had failed and were failing to meet margin calls. What Grieder details in his book is how Volcker confirmed the fundamental shift in Federal Reserve policy of Burns, by choosing to help the Hunt brothers, while letting Chrysler twist slowly in the wind. (Congress soon afterwards arranged an emergency loan for Chrysler). As Engdahl notes in his recent piece, Volcker had fundamentally altered the rules of the game: it was now "What's good for Wall Street is good for the country." And the real, physical economy could go to hell -- and it has, taking millions of decent paying jobs and much of American prosperity with it.
In his review of Greider’s Secrets of the Temple, Alan S. Murray, who met with Volcker twice, wrote in the January 1988 Washington Monthly
Volcker also represents what is most troubling about the Federal Reserve. Like his institution, he is aloof and disdainful of the messy ways of democratic government. He always operated in secret, and he was proud of his ability to give evasive answers that obscured the central bank's most important actions, even when those actions were sending shock waves through the lives of every American. In response to a reporter's question, Volcker once said gruffly: "We did what we did, we didn't do what we didn't do, and the result was what happened." The response typified his attitude towards an informed public. . . .
"Neither Congress nor the White House . . . could affect private lives with the immediacy and universal reach of the Federal Reserve's power, its ability to send instant signals rippling through every family's financial decisions, to change the incentives in virtually every business transaction," Greider writes. "The paradox for democracy was obvious: the Washington institution that was most intimately influential in the lives of ordinary citizens was the one they least understood, the one most securely shielded from popular control."
In another review of Grieder’s Secrets of the Temple, Steve Badrich is wonderfully concise and perfectly encapsulates the problem with BondDad’s diary:
The press commonly kowtows to Fed members as dispassionate wizards, whose decisions are based on technical criteria lying outside (or above) politics. Long-time Fed chairman Paul Volcker was often portrayed as the father who saved his children (us) from self- indulgence and 70s inflation.
Greider's contrary view is as simple as his arguments for it are longwinded. He sees the Fed as a racket designed to insulate crucial economic decisions from popular control. The Fed's propaganda war against "inflation" justifies the high interest rates that have wrecked the economy, while providing mega-payoffs to the superrich. Such populism is anathema to the respectable press . . .
I had read Greider’s book, many, many years ago, and I had grown up in the 1970s, so I knew that Bonddad’s praise of Volcker was unmerited. I found the above excerpts in just a few minutes of Google searches. But, over 300 DailyKos readers gave Bonddad’s posting a recommend, and left over 200 comments, more than 10 to one favorable. If so many progressives are that uninformed about economics and finance, then . . . then . . . hell, what’s the use? Vote Democratic, vote Republican – it’s not going to make a bit of difference to “the economic crowd.”
O wretched countrymen! What fury reigns? What more than madness has possess'd your brains?