by Will Beuttenmuller, Princeton University

Business Today:

Mr. Volcker, in a 1989 Time magazine interview, you said that in the late 1970’s, "The [Carter] Administration [was] deeply concerned …. [about] … exploding inflation and was willing to stand still for stronger measures than would ordinarily be the case. And that is a great advantage. If you can walk into a situation that is felt to be so severely out of kilter, you have greater freedom of action." Today the problem is not inflation, but do you see parallels between the crisis that the Carter administration faced in the late 1970’s and the challenges we face today. Are you comments from that time germane?

Paul Volcker:

Yes. Well, the point I was making is that when people are concerned about what’s going on, they are fearful, they want something done, you’ve got a constituency for action that you don’t have when everything is going fluidly. Let me illustrate this with what’s happened recently. This crisis was building up in one respect for a long period of time. The US as a whole, and consumers in particular, were spending more than they were earning. And this is building up then, along with sub-prime mortgages, and when no one wants to do anything about it, there is no sense of crisis or concern. It was all very comfortable. It is only when you have the crisis that people are ready to take firm action.

BT:

Staying on the subject of the bubble for a moment, how much do you attribute America’s proclivity to consumer more than she produces and China’s readiness to supply the country with easy money?

PV:

Well those were two underlying factors that were very important. They were an extreme manifestation of a somewhat broader problem. We weren’t the only ones overspending but we were the big boys. China was not the only country with a big export surplus, but they were again the big boys, so what you incite seems appropriate.

BT:

In your recent testimony before the congressional Joint Economic Committee, you said, “the first and most fundamental lesson of the crisis is that future policy should be alert to, and take appropriate measures to deal with, persistent and ultimately destabilizing economic imbalance.” There seems to be a debate here about whether or not the government should be in the business of popping bubbles. Would you say that those comments were weighing in on that debate?

PV:

Well, talk about popping bubbles is relative. (As Will if that’s what he said because I couldn’t make it out). You can have equilibrium that wouldn’t be apparent, in particular bubbles, if you think of some very extreme movement, but a bubble may be the culmination of some of these imbalances. What I’m saying is I’m worried about the disequilibrium before it reaches the point of an extreme bubble.

BT:

In that same speech to the joint economic committee, you also made some comments that suggest that commercial banks should be more clearly differentiated from financial institutions that engage heavily in capital market transactions. To some extent, this suggests that our total dismantling of Glass-Steagall structure was a mistake. Do you envision some compromise solution to protect commercial banks short of the bright lines developed in the Glass-Steagall era?

PV:

I just issued a report on the subject and it goes into some detail. It describes to some extent my position. I believe there should be a differentiation between commercial banking function, which is designed no serve individuals, businesses, governments, either in safeguarding their funds or providing loans and other services. And that shouldn’t be mixed up with extremely risky capital market activities like venture capital funds and equity funds and a lot of proprietary trading. We ought to keep those kind of separate, so that the first part, the banking part, gets protected as well as regulated.

BT:

You have a reputation as a fierce opponent of inflation, which at least in the late 1970’s was seen as the greater of two evils. Where does the threat of double-digit inflation create a stopping point for the ongoing government intervention? Do you fear that the recent stimulus will eventually lead to hyper-inflation?

PV:

Oh, boy. I worry about inflation as soon as it is noticeable. But, I don’t think the stimulus is likely to or will necessarily lead to hyper-inflation. It takes care to make sure that we reverse direction when it’s appropriate.

BT:

In October 2008, you and a few colleagues wrote an article in the WSJ expressing support for resurrecting the RTC. Under this solution, your propose that the government buy and warehouse paper that otherwise is effectively not trading, lessen the number of foreclosures, and assist the FDIC in resolving sick institutions. Do you still see this as a viable solution, and if so, would the sickest of institutions be put into government receivership as they were under the RTC in the 80s?

PV:

That is too complicated a question, because that’s only a part of a solution. You can certainly develop parts of that solution by putting companies into receivership. Now those issues are being greatly debated and it’s still on the table now.