The year was 1978.
The US Dollar was collapsing, inflation
was beginning to surge, the American economy was on
the brink of recession and many warned of the perils of easy money. Needless to say,
Arthur Burns, 10th Chairman of the US Federal Reserve, had a tough job.
While Burns is widely credited with
igniting the late 70's inflationary fires, it was
G. William Miller, the 11th Federal Reserve Chairman who
poured gasoline on the flames.
Before Miller's tenure was complete inflation had peaked
at roughly 13% pa and American wealth was being destroyed at an unprecedented rate. Commentators at the time compared America to
Germany's Wiemar republic, often employing colourful phrases such as "banana republic"
Stern fiscal medicine was needed and the 12th Chairman of the Federal Reserve,
Paul Volcker was just the man to do it. Before
"Tall Paul" Volcker's reign was over inflation had been markedly reduced - down to 3.2% in 1983 - but at a price. The United States endured
a long, deep recession, driven by high interest rates and the highest level of unemployment since 1934.
However many economists consider Volcker's remedy, his fiscal discipline
as laying a solid foundation for the economic success of the late 80's and early 90's.
So the year is 2008. The US Dollar is collapsing, inflation is beginning to surge, the United States is on the brink of recession and
some are warning about the dangers of easy money.
Will the legacy of
the 14th Chairman of the Federal Reserve be Ben Bernanke as Arthur Burns or Ben Bernanke as Paul Volcker?
Remember, there is no right or wrong answer. But please do try to avoid wearisome and inevitably grim (not to mention, oft repeated!!) predictions of impending economic disaster. The long view, the history of finance tells us not only has the United States been presented with similar, arguably identical problems in the past, we have dealt with them effectively. These times are hardly unique. We will get through them just fine.
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I distinctly remember the 70's, and actually took my first dabbles into the equity markets back then, going long after the Chrysler bailout (easy money!!). Those were radically different times, with bank CDs paying 16% or higher, some credit cards ruled illegal due to state usury laws, and even mortgages approaching 20%.
To many Burns presents a paradox: repeatedly warning of rising inflation [.pdf] in The United States even as The Fed, under his stewardship, pursued an expansionist monetary policy. However recently released tapes now document the extreme pressure Burns came under from The White House to pursue what Richard Nixon called an "easy money" policy (in the paranoid context of battling "A Jewish Cabal" mind you) .
Burns had long been a proponent of what he called "Prosperity without Inflation", arguing that by seeking to maximise employment The Fed would undertake stimulative actions that, while prolonging economic expansions would ultimately result in an upward price drift.
A well balanced book about Arthur Burns is Wyatt Wells' Economist In An Uncertain World:Arthur F. Burns and the Federal Reserve, 1970-1978.
Wells' work illustrates Burns' analytic approach, crediting him with the decision to publicise the beige book as well as solidifying decision making using The Fed's forecasting models. The book also documents Burns' intellectual flexibility, with him embracing tools and techniques he previously had rejected.
No doubt about it: considering the tumultuous politics - both domestic as well as international - of the era, the dynamic economic environment, Burns had an extraordinarily difficult job to do.
posted by Mutant at 4:29 AM on May 8 [2 favorites]