PAUL VOLCKER SETS A CHALLENGE FOR THE NEXT GENERATION / THE FINANCIAL TIMES OP EDITORIAL

Paul Volcker sets a challenge for the next generation

The former Fed chair wants attention to public service to be part of his legacy

Gillian Tett
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Paul Volcker, former Fed chairman, in 2008 © Getty


Last week, I received a poignant invitation: Paul Volcker, the legendary former chairman of the US Federal Reserve, asked me to visit his apartment to discuss his legacy.

Mr Volcker is publishing his memoir. The release of Keeping At It was initially scheduled for late November but the publisher has rushed the date forward to October because the former Fed chair is ill. So the towering figure of finance wanted to share some thoughts — and warnings — to current and future policymakers, politicians, voters and investors.

The message is sobering. Some of the points on Mr Volcker’s mind involve finance and economics. No surprise there. As Fed chair in the 1970s hecrushed inflation and, after the 2008 financial crisis, he helped to craft reforms, as economic adviser to Barack Obama’s White House. His memoir explains in lively detail how he (and others) spent the second half of the 20th century experimenting with different policy tools, to deal with the crumbling postwar Bretton Woods global economic order.

This is partly a tale of 20th-century financial policy innovation — and progress. But not entirely. Mr Volcker thinks that there are three areas where progress is going into reverse.

First, he is uneasy about the 21st-century central banking fashion — or obsession — for chasing a 2 per cent inflation target. He thinks it is “ridiculous to be worrying about the [fine details] of 1.75 per cent or 2 per cent” price growth. He suggests central banks would do better to chase price stability, since deflationary dangers are overstated.

Second, he is uneasy about the risks to the financial system unleashed by the past decade of experimental quantitative easing policies: “There’s a lot of leverage going on now, a lot of debt . . . interest rates are very low,” he observed, predicting that someone of my age (51) will probably see “at least two” more financial crises.

That threat of another crisis is exacerbated by a third point: a decade after the credit crunch, financiers are slipping back into bad habits, he fears, chasing “chicanery” and lobbying to loosen regulation, such as the “ Volcker rule” he authored to curb proprietary trading after 2008.

These are important warnings. Many observers were not fans of the Volcker rule. Others might disagree with his views on QE. But he is entirely correct to warn about the wider dangers of financial reform backsliding and the distortions unleashed by QE. Let us hope he will be heeded.

More surprising is that, when Mr Volcker thinks about his message to the next generation, it is not finance or economics that is at the top of his mind. On the contrary, he emphasises, “I would like my legacy to be some attention to public service.”

Mr Volcker fears that, as the 21st century wears on, society is abandoning the 20th-century idea that government should be valued and supported, particularly in America. “When I grew up good government was a good slogan,” he says, pointing out that public service was so respected in the 1950s that courses in “public administration” commanded high status at universities such as Princeton.

“But now the phrase ‘good government’ is a mockery,” he laments. Universities have effectively abandoned practical public administration training, focusing instead on “policy”. Few students want to make the type of financial sacrifices that Mr Volcker did for many decades, in the name of public service.

He has tried to fight back, by launching initiatives to champion public administration education. But it has “been a struggle”, he admits. “I thought I could raise money for this from these guys who had billions. No! They are all anti-government and don’t care. It’s a losing proposition.”

This is alarming and important — not least because the issue is so rarely discussed. After all, if there were ever a time when the US needs effective public administration to handle problems ranging from climate change to education — or even just to referee free market solutions — it is now. But, as the author Michael Lewis describes in The Fifth Risk, the administration of President Donald Trump is, at best, uninterested in the functions of government. At worst, it is deliberately hostile to them.

The neglect and hostility is creating visible risks: Mr Trump’s recent attacks on the Fed, say, could undermine its credibility. Mr Lewis’s book describes less visible threats too, such as the dangerous impact on the nuclear sector of this indifference.

Let us hope the publication of Mr Volcker’s memoir will draw attention to the issue of how to make government more credible, popular and effective. Perhaps, in discussions about Mr Volcker’s legacy, some benefactors will respond by creating programmes to make public administration more exciting. We need the next generation of Volckers.

But the truth is that, at the age of 91, Mr Volcker doubts he will live to see this debate about public service. “I hope people listen,” he said, as I finally left his apartment, with a lump in my throat. “But will they?” It is a lament — and a timely challenge.