Volcker to Bernanke: You Suck!

Paul Volcker, the greatest Fed chairman ever and the man who got us out of Jimmy Carter's stagflation 70's, tells it like it is:

"You don't have to predict it. We're in it." Thus did Paul Volcker respond to a question Tuesday about whether he still predicted a "dollar crisis" in the coming years. [...]

On the dollar, Mr. Volcker's blunt talk of crisis is a welcome tonic to the devaluationist consensus that now dominates Washington. The world has been staging a run on the greenback, with damaging results if it continues. Mr. Volcker noted that when "concerns about recession are rife," the central bank will be tempted to "subordinate the fundamental need to maintain a reliable currency" to the impulse to shore up a flagging economy. The danger is that you lose both battles, as the U.S. did in the 1970s, and wind up with stagflation.

The present climate, Mr. Volcker told his audience, reminded him of nothing so much as the early 1970s. Then as now, certain commodity prices were rising fast – he cited oil and soybeans as two examples. Then as now too, these were explained away as speculative price run-ups and not as a harbinger of a broader inflationary trend. [...]

Mr. Volcker also argued Tuesday that the Fed's strenuous efforts on behalf of the housing market risked looking "biased to favor particular institutions or politically sensitive constituencies," in this case the housing industry. He did not argue that no government intervention was warranted – the crisis was, he said, "too threatening" for the government to stand aside.

But the Fed has a particular duty to defend the integrity of the "fiat currency" in its charge. And exchanging dollars for "mortgage-backed securities of questionable pedigree" both raises the specter of moral hazard and potentially undermines the world's faith in the integrity of the Fed's balance sheet. Unless the Fed can shut the door it opened with its guarantee of $29 billion worth of Bear Stearns paper – which "seems highly unlikely," in Mr. Volcker's words – it will have to take on oversight of the institutions it is now implicitly back-stopping.

Imagine the sadness of a titan like Volcker seeing his office debauched by imbeciles like Greenspan and Bernanke. Ronald Reagan was lucky in comparison: he was deep in an Alzheimer's haze before having to see Dubya in the Oval Office.