Volcker Is a Great Pick

12/01/2008 11:56 am EST

Focus: MARKETS

Terry Savage

Author, The Savage Truth on Money

The stock market likes President-elect Barack Obama’s picks for his economic team—and you should, too.

Though the market has more than personalities to consider these days, the gains of last week can certainly be considered a sign that investors are thinking far more positively than they were in the two-day rout that greeted Senator Obama’s election victory. 

The most confidence-inspiring move came as former Federal Reserve Chairman Paul Volcker was named Wednesday to chair a new independent panel advising the President on the financial markets and the economy. The president-elect couldn’t have made a better choice—both practically and symbolically.

For those who don’t remember his actions of 25 years ago when he was Fed Chairman, let me say concisely that Paul Volcker saved the American dollar and the economy. 

When President Jimmy Carter named him Fed chairman in 1979, inflation was soaring.  Consumer prices were rising at a 13% annual rate, reflecting the previous decade’s increase in the money supply to pay for the Vietnam War, Great Society social programs, and rising energy prices. As a result, the dollar was crashing and gold traded at $850 an ounce.

The towering Volcker (he stands 6’ 7” tall) had the courage to push interest rates so high that the prime rate hit 21½%! It was enough to chill the economy into a severe recession in 1980-1982, but his tough medicine ultimately restored faith in the dollar. And that move paved the way, in part, for two decades of economic growth.

I spoke with Mr. Volcker in September, at a global financial leadership conference, just as the banking crisis was heating up. He was a strong advocate of creating a separate government-backed institution to buy the bad assets, liquefying the banks so they could keep credit flowing. Instead, Treasury Secretary Henry Paulson’s bailout program lurched from one plan to another, always a step behind the curve.

I have no doubt that Paul Volcker will be a creative force for market-based solutions and programs within the president’s new economic team. That’s what market participants were applauding with a rally.

There will be tough economic times ahead, but it’s good to know that the people making policy understand the problems—and that they have a track record of success. Your thoughts about Volcker or the rest of the Obama economic team? Please join the conversation.

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