Secrets of the temple, how the Federal Reserve runs the country by William Greider

Author:William Greider [Greider, William]
Language: eng
Format: epub
Tags: http://archive.org/details/secretsoftemple000grei
Published: 0101-01-01T00:00:00+00:00

Volcker’s sensibilities nearly always shaped the final decision. “Volcker didn’t decide to take away the punch bowl just as the party was getting good,” one of his aides joked. “He came in and hit it with a hammer.”

Earlier in the spring of 1981, the French ambassador called on Anthony Solomon, president of the New York Fed, and asked him what his outlook was for the American economy. The new government of Frangois Mitterrand was taking power in Paris and France’s economic policy would necessarily be influenced by what direction the United States, the locomotive of the world’s economy, intended to take.

I told him the U.S. was going into recession [Solomon said]. The French finance minister asked the same question at Treasury and was told that a great boom was ahead in America. I later learned that Mitterrand, at his first Cabinet meeting, announced that his government could pursue an expansionist policy because the U.S. would be booming. He was told that I was predicting a contraction. Mitterrand said, “Let’s go ahead and take the expansionist route because the Treasury has given us irrevocable assurances.” He was warned that it was a gamble. They went ahead anyway and, of course, they got clobbered.

The awkward little secret of the American system was that modern recessions did not flow ineluctably from mysterious natural forces in the business cycle. Recessions were induced by the federal government. In the seven recessions since World War II, the same transaction had preceded each contraction: the Federal Reserve’s decision to force up interest rates to an abnormal level. If it kept them there long enough, the economy would inevitably decline. Given that power equation, it was natural for Tony Solomon to understand what lay ahead for the American economy even if the Secretary of the Treasury did not.

For months, Nancy Teeters had also assumed recession was imminent. So did Governor Charles Partee and Governor Emmett Rice. “Nobody wishes to see hardship,” Rice explained. “Nobody likes to see people lose their jobs and GNP stop growing. But, sometimes, given developments, it’s inevitable.”

The crucial development, of course, was at the Federal Reserve itself. In broad terms, the governors could argue that they had no choice, given their commitment to curb price inflation. In specific terms, however, it was not price inflation that broke the economic expansion and forced a contraction. It was the high interest rates engineered by the Fed.

“You’re always going to take a risk of a recession when you’re in this process,” Volcker acknowledged. “It’s always a question of when. If you’re never going to take that risk, you’re not going to do anything and end up with recession anyway.”

This distinction was an important refuge for Fed governors. Yes, they would concede, they put the economy at risk, pushed it toward the cliff. But that’s not the same as saying they deliberately provoked recession. To people who experienced the consequences, it would seem a distinction without much difference.

For obvious reasons, the Fed never declared their expectations in advance.

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