Obama's White Knight...Paul Volcker

A short historical perspective on Paul Volcker that casts a different light on his economic genius: http://www.realclearmarkets.com/articles/2008/02/the_paul_volcker_myth.html

Volcker's focus on managing the money supply was a failed attempt at creating growth. Ultimately, it was banking deregulation that broke the cycle. Banks started issuing "NOW" accounts, which swelled bank reserves with capital that was previously in money market mutual funds. We exited the early 80's recession with a step-function change in bank reserves, combined with tax cuts, that increased risk appetite.

I'm not necessarily pointing this out to say that deregulation is the answer to our current problems. Rather, I simply observe that our general prosperity since the early '80's was fueled by ever-decreasing banking and business regulations, and now that the populist sentiment is that more regulation is needed, we are extremely likely to at last pay for the contraction of the 70's as policy shifts to reregulation.

We are working through some massive pendulum swings as a culture right now. Regulations went from being anti-business to eventually anti-capitalist and therefore anti-American. Now they are the savior. Will the government cure our job losses by mandating long severance periods, such as those of France? I think they will eventually come to decide this is part of the answer. [I disagree.] Credit is contracting and the government can't fill the void fast enough (not that I think they should attempt to), and businesses are reacting with layoffs, which perpetuates the cycle. Businesses are looking out for themselves and they will continue to react to the shrinking economy with additional layoffs as demand continues to fall. The problem no longer can be solved by arresting falling housing prices, layoffs have to be arrested. There should be a lot more corporate cash available to hold on to workers that we don't need on the payroll, since the move to cap executive pay has begun. The transition will be very distracting to the economy; the deflation of executive pay will crimp consumer spending and individual income tax receipts like nobody's business, this on top of already rapid declines on both fronts.

A simple blog morphed into a rant. The good news is that we're more likely to come out of this with more experience in the White House. We just have to wait about 3.9 years.

Joe