Paul Volcker (Paul Volcker), born on September 5, 1927, is an economist and politician.
He served as chairman of the Federal Reserve Board from 1979 to 1987, playing a key role in stabilizing the U.S. economy in the 1980s.
Greenspan praised him as "the father of American economic vitality over the past two decades."
Dalio called him "a man of extraordinary principles."
Walker passed away on December 9, 2019, at the age of 92.
The "three truths" and final outlook proposed by Volcker in the article are far beyond the economic and financial fields. His words reveal a wise man's deep concern and firm belief in the development of the United States and even mankind.
September 5, 1927, peaceful Cape May, New Jersey.
September 5, 2018, New York City, the hustle and bustle of New York City.
From a spatial perspective, Cape May and New York City are not far apart, with only 160 miles (about 260 kilometers) of highways without red lights in between. In terms of time, my 90-year life journey has been full of twists and turns, punctuated by long detours, and I encountered some significant challenges that still require attention today.
When I was a child during the Great Depression, I was protected by a strong and secure family. When I was a teenager, I was inspired by the events that saw Winston Churchill almost single-handedly stand up against Nazi tyranny, Franklin Roosevelt declare the Four Freedoms, and ultimately lead to a truly "American" victory in World War II. When I was a student, I received the best education a great university had to offer and began to understand different perspectives on the political and economic world. I have spent most of my adult life in government, the Treasury Department, and the Federal Reserve, and I am proud to be a member of a confident and powerful nation destined to lead the free world.
I loved the time I spent with my young family in Washington, D.C., in the 1960s and 1970s. We have many good friends, most of whom are engaged in public service. We share a common pride in helping shape economic policy and contributing to the American ideals of liberal democracy, open markets, and the supremacy of the law.
However, today, the environment is completely different. The surge of populist trends in some countries and the power of arbitrary governments have challenged the leadership of the United States. Growing ideological divisions within the United States, even within long-established political parties, present huge and unfamiliar new challenges.
We have come to question all the hallmarks of our great society: our public education system and respected universities, our once "reliable" free press, even scientific expertise. The legitimacy of our courts, Congress, the president himself—all the fundamental institutions of our constitutional democracy has been called into question.
"Good government," a once highly regarded phrase, is now seen as an oxymoron rather than a recognized goal of American society. Cynicism is spreading and is everywhere.
One thing is for sure - I never want to go to Washington again, even though I've had the pleasure of spending most of my career there and it's where my family once considered home. Because today, Washington, a middle-class, mid-sized city dominated by a public service ethic, exudes the aura of wealth and power. Neither a financial center like New York nor a technology center like Silicon Valley, Washington's funds are mainly used to formulate public policies and laws to benefit specific interest groups. This is also reflected in the rising demand for office space, luxury hotels, high-priced apartments and restaurants to serve the growing number of lawyers and lobbyists.
According to reports, the per capita income of residents in the area surrounding Washington is currently at the highest level. I don't know how many senators and representatives there are among these residents now, or what their incomes are. All I know is that they spend a lot of time "making phone calls asking for more dollars" to fund expensive campaigns and very little time in Washington engaging with colleagues, finding compromises, and building consensus.
Today, in this country, we face a huge challenge: restoring the public's sense of mission and trust in government. We urgently need reforms in the political process, and we need leaders who can lead us to reshape and preserve the great democratic consensus.
This can be a challenge for energetic people who are new to the world of politics. But as a now-advanced public servant, I have still been able to distill some key lessons from decades of public service, which I call “three truths.”
In fact, this is why I finally decided to write this book.
stable prices
Early in my second term as Fed chairman, a colleague complained at an Open Market Committee meeting that we were being accused of being "knee-jerk inflation warriors." I responded immediately that it was a "pretty good reputation" and showed we were making progress.
Trust in currency is fundamental to good government and economic growth. Given the role of the dollar and the U.S. financial system in the world, this impact extends far beyond the confines of our country.
Our monetary system, like those of almost all countries, relies on fiat currency. There is no gold or other valuable hard asset pegged to banknotes (or bank deposits) at a fixed exchange price. We implicitly take for granted the stability of our currency, or as it should be, that our currency can buy groceries, a house, or even a bond that promises to pay a certain amount of dollars in the future, today, tomorrow, and even into the future.
Maintaining such expectations and confidence is a basic responsibility of monetary policy. Once lost, the consequences will be serious and stability will be difficult to restore. Interest rates are rising, savings are being squeezed, and foreign exchange markets currencies are depreciating. Some traders and speculators may stand out, but working-class people and those on fixed incomes, like most retirees, will suffer.
In the 1970s, the United States experienced this kind of "stagflation", with price increases reaching the highest level in peaceful history. As is often the case, the inflationary process creates a vicious cycle, with expectations of rising prices leading to greater inflation. In the absence of other effective options, it was eventually wiped out by strong monetary policy. A severe recession is inevitable. Our experience with the failed anti-inflation attempts in the mid-1970s and the need for more sustained efforts in the early 1980s have repeatedly reminded us that once prices stabilize, they must remain stable.
Today’s environment is completely different. The generation that experienced stagflation is slowly passing away. By contrast, over the past 30 years we have maintained enough price stability that low or zero inflation expectations are ingrained in our thinking. Factors such as cheap imports from countries such as China have played a role, and our monetary authorities clearly understand the importance of maintaining price stability. There is no doubt that these firm expectations largely helped the United States absorb huge budget deficits and inject official liquidity on a large scale during and after the 2008 financial crisis without awakening inflationary forces.
One lesson my career has taught me is that such success can sow the seeds of its own destruction. I see country after country struggling to restore stability in the face of destructive inflation.Yet with victory in sight, the authorities relaxed controls and accepted "mild inflation" in the hope of stimulating further economic growth, ultimately causing the entire process to start over again. The tragic history of economic policy in much of Latin America provides too many examples.
The United States is not like Latin America, which has a history of frequent inflation, but the United States does face ongoing challenges with monetary and fiscal policy. Currently, while labor market pressures are increasing and the long-term expansion and full employment have not disrupted price stability, this is a critical period for monetary policy.
As I mentioned before, the late Bill Martin was famous for his central bank 's job is to "put away the blackjack when the party is getting good." A hard fact of life is that few hosts are willing to end a party prematurely—they wait too long, so by the time the risks become apparent, the real damage has already been done.
The central bank governor is the master of the "economic party". Too often, monetary restrictions - never popular - are delayed for too long. Once the inflationary process began, the challenges became more severe.
Today, after recognizing the need to regulate inflation, modern central banks, including the Federal Reserve, have reached a surprising consensus to set a new inflation rate policy "red line": in a carefully designed consumer price index, a 2% growth rate is acceptable, even desirable, but at the same time it is also the limit.
I'm confused about how it works. Years ago, there was no 2% goal or limit in my textbook. I don't know what the theory is for this. Being a goal and a limitation at the same time is difficult. If the inflation rate manages to stay at 2%, this means that the price level will double in a little more than a generation.
I do know some actual situations. No price index can accurately reflect actual changes in consumer prices that are only 1/10 or 1/4 percentage point. The different types of goods and services, changes in demand, and subtle changes in price and quality are too complex to allow precise calculations on a monthly or yearly basis. In addition, there is a tendency for prices to change as the economy grows or slows down, rising a bit during periods of economic expansion and falling a bit during periods of economic slowdown or recession, but not in sideways movements year after year.
However, as I write these words, with economic growth and unemployment approaching historic lows, people are starting to worry that consumer price growth is too slow - simply because it is about a quarter below the 2% target! Does this mean “easing” monetary policy, or at least delaying tightening, even when the economy is at full employment?
Of course, this is nonsense. How do central bankers fall into such a trap? Giving so much weight to small changes in a single statistic has its own inherent weaknesses. I think I know the root cause - this is not a question of theory or in-depth empirical research on for , but rather a very practical decision made by the relevant authorities in a distant place.
New Zealand is a small country famous for its trout fishing. So when I left the Federal Reserve in 1987, I happily accepted an invitation to visit. As it turns out, I was "scammed" in this regard. After getting off the plane in Auckland , I learned that the fishing season was over. Had I known this, I would have left my fly rod at home.
But in other respects the visit was fascinating. New Zealand's economic policy is undergoing fundamental changes. Years of high inflation, sluggish economic growth and rising foreign debt have led to a shift in favor of free markets and a fierce fight against inflation under the leadership of the traditional left-wing Labor Party.
The changes include narrowing the central bank's focus to a single goal: reducing inflation to a predetermined target. The new government has set an annual inflation rate of 0~2% as the central bank's main target.The simplicity of the goal is seen as part of its appeal - no excuses, no versus , one policy, one tool. Within a year or so, inflation dropped to around 2%.
New Zealand Central Bank Governor Donald Brash is like a traveling salesman, he has many customers. I thought about its appeal in practice when I read the discussion at the July 1996 Federal Open Market Committee meeting about the Fed's "price stability" goals. Janet Yellen asked Federal Reserve Chairman Alan Greenspan at the time: "How do you define price stability?" To me, he gave the only reasonable answer: "Expected changes in the general price level do not effectively alter the state of business or household decision-making."
Janet insisted, "Can you give me a number for this state?"
So Alan's general principles, which seemed to me to be entirely appropriate, were finally translated into a number. After all, those regression models computed by staff trained in econometrics must be fed by data, not principles.
I understand that a reasonable argument can be made for 2% as an upper limit for "stability". Some analysts pointed out that official price indexes often exaggerate price increases because they do not take into account that the quality of goods and services will improve over time. The analysis also pointed out that expectations and behavior are determined by the price of goods, which are suppressed by productivity improvements and fierce competition, rather than by the cost of services such as education and medical care, for which productivity improvements are slow.
But it is also true that the seeds of danger are sown. This seemingly precise number suggests that fiscal policy can be fine-tuned with more flexible targets as conditions change. If growth is too weak, maybe it could be raised to 3% to provide a little stimulus? If 3% is not enough, why not increase it to 4%?
I didn’t compile the numbers randomly. I occasionally read about such an idea being proposed by a Federal Reserve official or International Monetary Fund economist, and more often by economics professors. In Japan, this seems to be the new creed. I haven't heard anyone say that in a strong economy perhaps the inflation target should be lowered!
The fact is that even if this were desirable, monetary and fiscal policy tools do not allow for this degree of precision. Giving in to the temptation to "test the waters" will only weaken the commitment to stability that 's sound monetary policy requires.
Some of my Harvard professors declared a long time ago that slight inflation is a good thing for employment. This age-old belief persists, despite research and decades of experience from Nobel Prize winners in showing otherwise. In new, more sophisticated forms, what seems to be driving the debate is the fear of deflationary .
Deflation, is defined as a significant decrease in prices. If it continues long-term, that's a serious problem indeed. There has been no deflation in the United States for more than 80 years.
Indeed, nominal interest rates cannot fall significantly below zero. So, the argument goes, let's keep "a little inflation" - even in a recession - as a safeguard, a "backdoor" way of getting "real" interest rates negative. Consumers will be motivated to buy products today that may be more expensive tomorrow; borrowers will be tempted to borrow at zero or low interest rates to invest before prices rise further.
In my opinion, these views lack empirical support. However, concerns about deflation appear to have become widespread among officials and commentators. Even in July 1984, when my colleagues at the Federal Reserve and I were monitoring 4 percent inflation, the New York Times ran a front-page article about potential deflation. Actual deflation is rare.In reality, however, this fear can easily lead to policies that unintentionally increase risk.
History tells the story. In the United States, we had decades of good growth without inflation—the 1950s and early 1960s, and the 1990s until the early 2000s. Those stable years were followed by eight recessions, most of which were short-lived and did not lead to deflation.
We only experienced severe deflation once, in the 1930s. In 2008-2009, people had reason to worry about deflation. The common feature of these two events is the collapse of the financial system.
We cannot expect to prevent all financial excesses and recessions in the future. This is the historical pattern of free markets, financial innovation, and our innate “animal spirits.” To me, the lesson was very clear and profound. Deflation is the threat posed by a severe breakdown in the financial system. In the absence of systemic financial turbulence, not even the Great Recessions of 1975 and 1982, slow growth and cyclical recessions posed such risks.
The real danger comes from encouraging or inadvertently tolerating rising inflation and its close cousins of extreme speculation and risk-taking, namely standing by while bubbles and excesses threaten financial markets. But the irony is that "easy money" that strives to achieve "mild inflation" as a means of preventing deflation may in turn ultimately lead to deflation.
This is the basic lesson of monetary policy, which requires prudential supervision of price stability and the financial system. These two requirements will inevitably prompt and require the central bank to perform its duties.
Sound financial
Central banks have been around for a long time. Originally, they were designed to help government finance . They can also issue currency and provide some discipline to other banks. Alexander Hamilton The short-lived National Bank of the United States established by Alexander Hamilton is an example.
This early precursor to a central bank failed due to concerns that East Coast economic interests would stifle states' economic independence and growth. It was not until 1913, in the wake of an increasingly devastating banking crisis, that the United States established a true central bank to issue currency, rationalize bank reserve requirements, provide loans to banks, and impose state regulation. It took another 20 years for the new system to realize its full potential.
There are good reasons why the structure of the Federal Reserve System was designed to be as complex as it is, and remains that way. As an act of political compromise, the “system” seeks to balance unified policy with regional interests, independence with public responsibility, government control with private participation.
The Federal Reserve is also a controversial institution at times and by its very nature. The debate focuses more on policies and powers than on its unique organizational structure. But policy and organization are indeed inseparable. The key is "independence" - this was the first point I wrote in my notes in preparation for my first meeting with President Carter, and it was no accident. The second point I write about is “policy” – how this independence should be exercised.
The Fed is bound to cause controversy when it comes to implementing restrictive monetary policies and supervising financial institutions. That's why the system needs protection against what I call interest funneling or partisan political pressure. At the same time, the Fed is undoubtedly part of the government. Its authority derives from Congress's constitutional obligation to "coin money and regulate its value." It is not part of the executive branch subject to "presidential orders," no matter what James Baker said in 1984.
From the actual situation, 435 representatives and 100 senators cannot be responsible for the daily operations and policy decisions of the central bank. Congress also does not want to give this power to the president.Similar considerations have driven the creation of other so-called independent agencies, some of which are older than the Fed. However, no agency has the structural safeguards to preserve independence and the breadth of responsibilities that Congress has explicitly assigned over the years to match the Fed.
The U.S. Federal Reserve System is self-sufficient and has sufficient operating income.
html The 47 council members serve 14-year terms and can only be removed "for cause."
The chairman serves as a member of the Board of Directors with a term of 4 years.
12 Reserve Banks with operational and some policy responsibilities are located across the country. This model may seem strange today, but in 1913 it made political sense.
The presidents of the 12 regional reserve banks are appointed by the directors of each bank and approved by the U.S. Federal Reserve Board of Governors. The Federal Reserve Board of Governors appoints three of the nine directors to each regional reserve bank's board of directors, with the remaining six directors selected by private "member banks" but requiring them to represent a variety of interests and experience.
These all look complex on the outside. It’s hard to explain when your dining companion innocently asks, “What do you do?” It’s easy to be tempted to tinker with the structure of your organization. Do we really need 12 reserve banks? Are their current layouts (including two in and in Missouri) reasonable? Isn't it politically awkward that individual Reserve Banks are technically still owned by private member banks that are regulated by the Fed? Is the oft-cited suggestion that the U.S. Government Accountability Office should "audit" the Federal Reserve appropriate?
Each of us who has held important responsibilities has our own ideas about what kind of organizational change is logical. But change can quickly become a threat—one tinker inviting another. Beneath the seemingly innocuous proposals for reform, ulterior motives lurk.
Some in Congress often ask the Government Accountability Office to conduct audits of the Federal Reserve Board of Governors and the Federal Open Market Committee, but the true intent is clear. It is not about monitoring business efficiency and ensuring that expenses are accurately accounted for. The Federal Accountability Office has conducted an audit of the Federal Reserve's spending and has privately audited the spending of regional federal reserve banks. Rather, it is a game of influencing policy.
Large organizational issues do arise that require attention, not just for the Fed but for all agencies involved in banking and financial regulation. A series of financial institutions with overlapping powers and sometimes inconsistent policies are “historical accidents.” The Office of the Comptroller of the Currency was established during the Civil War when the National Bank's system was approved. In 1933, following the collapse of the banking industry during the Great Depression, state-chartered banks came under the supervision of the Federal Deposit Insurance Corporation. When created, the Federal Reserve had the same power over its member banks, whether national or state-chartered. It was not until the 1970s that it gained regulatory authority over all bank holding companies. Today, these companies have ownership stakes in large banks. The SEC has authority to regulate independent investment banks, even within bank holding companies, but it retains responsibility for regulating broker and agent functions and for regulating bank-like money market funds. Both the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission regulate derivatives. Insurance companies are regulated by the state. A range of new financial institutions, including hedge fund , do not have designated regulators.
Who is supervising the overall situation? Before the 2008 financial crisis, the honest answer was: no one. Because of the nature of its responsibilities with respect to monetary policy, bank holding companies, and overall financial stability, the Federal Reserve sometimes assumes or attempts to assume a leading role, but this depends on specific personalities and interests.
To some extent, the current answer is the Federal Stability Oversight Council, which created the Dodd-Frank Act in 2010. Backed by the finance minister, it was intended to promote coherence and cooperation among financial institutions, but it wasn't very effective. Efforts to strengthen common rule-making are valuable but insufficient. Importantly, the regulatory system created when traditional banks dominated financial markets was completely disconnected from the key elements of modern finance: companies driven by trading, securitization and derivatives. The new credit entity performs bank-like functions. Corporate debt levels are rising irreversibly beyond the reach of existing regulations.
As far as I know, there are no agency executives, bankers, and other experienced players who do not believe that there are serious overlaps and flaws in the current system. Its excesses and inconsistencies in oversight and enforcement leave the financial system vulnerable to manipulation and collapse. Those who are unaware of the frustrations of Treasury Secretary Paulson, Geithner, and Chairman Bernanke in dealing with the financial crisis cannot understand their laments.
So what should we do? In particular, what should we do about the Federal Reserve? It has the broadest responsibilities in law and practice. It alone manages monetary policy, controls the money supply and influences interest rates. It participates directly in the massive government securities market. It buys and sells with almost no restrictions to achieve its policy goals. It has direct regulatory authority over large bank holding companies. It maintains liaison with foreign monetary policy and regulatory authorities. In emergencies, it can marshal massive resources.
The scope of the Fed’s involvement in banking and financial markets—and the simple fact that it is viewed by Congress and the public as the “guardian of financial stability”—makes it natural that the Fed’s responsibilities actually go beyond those clearly outlined in the law.
Fed staffing has grown, and should grow, both in Washington and at regional reserve banks. This growth has gone beyond the regulation of commercial banks and regulated the financial system more broadly. But informal supervision, no matter how competent, cannot equate to clear responsibility and authority. Federal Reserve leadership, both at the Board of Governors and at the regional reserve banks, has at times been reluctant—or even opposed—to undertake regulatory efforts that could undermine its primary responsibility for monetary policy.
An anecdote from Janet Yellen, former chair of the Federal Reserve, illustrates this point again. In testimony to a government inquiry into the financial crisis, she was reminded that as president of the Federal Reserve Bank of San Francisco, she had expressed concern about the spread of subprime mortgages. San Francisco is a hot spot, so it is perhaps natural that Ms. Yellen focused relatively early on on a credit glut that had gone unnoticed elsewhere. This also demonstrates the importance of regional reserve banks.
The question naturally arises: "What did you do about it?" The answer, in short, is that the San Francisco Fed has no power. What about the Federal Reserve in Washington? Nor did it take notice, even as Yellen and one or two other insiders raised the issue (quietly). Didn’t these activities take place at bank holding companies regulated by the Federal Reserve? Yes, but typically in the non-bank sector, such as broker-dealers, where the primary regulators are other agencies.
In November 2010, Yellen explained in an interview with staff of the Financial Crisis Inquiry Committee: "We are focusing on the banking system, and I don't think we are paying enough attention to the risks of the entire financial system."
Okay! It didn’t take long for subprime mortgages to overturn the entire financial system!
As chairman of President Obama's Economic Recovery Advisory Council, I have a seat at the table in discussions about regulatory reform.I have experienced financial crises many times, and in addition to the unanimous consensus on the need for higher capital standards for commercial banks, extensive supervision of financial markets, orderly resolution or closure of failed banks by regulators, and compliance with the requirements for final liquidation, I have two special priorities.
is best known as the so-called " Volcker Rule ," which targets banks' proprietary (i.e., non-customer-driven) trading. The simple idea is that institutions that benefit from the protection of the federal safety net should not take advantage of the hard-won broad understanding and support of the public to speculate. During the crisis, the safety net's stated role has gone well beyond insuring retail deposits and providing Federal Reserve discounts to solvent banks. For example, the Troubled Asset Relief Program allowed the Treasury Department to use taxpayer dollars to stabilize financial institutions and even the auto industry. The new rules will be fleshed out through informal oversight, provided the five relevant agencies can agree on the necessary regulations.
The political reality is that each agency has its own leadership, staff, constituencies, and congressional committee oversight, and each agency has varying degrees of urgency for oversight and enforcement. In the case of the Volcker Rule, it took five years to reach consensus and adopt a regulation that ran into thousands of pages.
My other contribution is simpler and more direct. I believe the Federal Reserve needs to be prodded and equipped to effectively and sustainably discharge its broad responsibilities for the stability of the financial system. To secure attention, I propose that the President designate, and Congress confirm, one of the seven Fed Board of Governors members serve as Vice Chairman for Supervision. He or she will be directly accountable to Congress through a semiannual report on the state of the financial system.
This may be a bit embarrassing for the Fed chairman. However, responsibility for rulemaking and oversight will continue to rest with the President and the Board of Governors as a whole. Crucially, having one board member clearly responsible for oversight under the law should ensure that the system as a whole does not avoid oversight responsibilities.
It took a long time before this position was filled. Mr. Randall Quarles, I'd love to see how you handle this job.
The broader and more fundamental organizational issue is how to address the overlap and gaps between institutions.
The Volcker Alliance released a report outlining one possible approach. It will consolidate the supervisory functions of the financial system into a single entity, whose board of directors will include representatives of every relevant agency. The new entity may be led by, or closely related to, the Fed’s new vice chair for supervision. To maintain checks and balances, rulemaking (a supervisory function) may be led by the Federal Reserve and subject to review and comment by the Federal Stability Oversight Council or other agencies.
Obviously, there are some other methods to consider. Before the financial crisis, then-Treasury Secretary Paulson tried to develop a somewhat similar approach, with some success. After the financial crisis, the UK put the Bank of England in charge of the newly established Prudential Regulation Authority, essentially linking day-to-day regulatory powers with monetary policy. Other methods are also controversial within EU .
The key question is the extent to which the central bank should assume full responsibility for supervision, regulation and management. Effectiveness and efficiency need to be consolidated, and the need to obtain a variety of perspectives and checks and balances needs to be considered. However, since the central bank's intrinsic interest lies in market stability, the scope of its regulatory and supervisory responsibilities, and its relative independence from political pressure, it cannot and cannot reasonably withdraw from active participation.
The British experience is a vivid demonstration lesson. About 20 years ago, in an effort to restore the BoE's operational independence, its supervisory powers were given to a new sister agency. The practical result was a delay in recognizing potential market excesses and the fragility of the financial system if a little-known but aggressive bank failed. This is regrettable.
The UK government quickly reversed course and placed regulatory functions entirely back within the Bank of England remit.
Recently, a friend pointed out to me that the Federal Reserve is almost unique among major federal agencies in that its basic organization and responsibilities are not currently under threat from the Trump administration.
I think the Fed has actually been well respected by Congress and the president over the years. In an environment where trust in government is dangerously low, the Fed remains extremely trustworthy. As such, it is a national asset.
It is not unaccountable.
It is not error-free.
It does require the attention of Congress to ensure that it has the ability to maintain responsible and efficient stewardship of its responsibilities.
And, it does need to stay away from partisan politics.
All in all, it remains a valuable asset to the country during turbulent times.
Good Government
Good Government – This is a phrase we don’t hear very often today.
If we hear this phrase, we may think of Ronald Reagan's motto: "The problem is government." Before I close this book, I can say with absolute certainty: Our proud democratic government is indeed in trouble at every level.
Poll after poll has sent this message. Only about 20% trust the federal government to do the right thing most of the time. Congress fares even worse in terms of public opinion. Even the courts and the media, the so-called fourth branch of democratic government, have a bad reputation.
This is not just a matter of polls and popular opinion. In a paper written for the Volcker Alliance, renowned public administration professor Paul Wright noted that since the early 21st century to the present, the U.S. government has demonstrated 48 times problems that were sufficiently obvious to warrant significant national media interest. His examples include the failure to coordinate known intelligence beforehand when the 9/11 attacks could have been predicted; the inability to respond effectively to Hurricane Katrina in New Orleans; inadequate inspections of oil rigs in the Gulf of Mexico; and, in my field, the inability to understand and foresee the fragility of the financial system before the 2008 collapse. There have been many such examples since he published his paper in 2015.
I understand that in the complex, interdependent world we live in, some management errors are inevitable. There is a conflict between policies. Politics - crude electoral politics - affects government administration. But Professor Wright's careful analysis points to some distressing conclusions. The number of problems may also increase over time, possibly because the government is trying to do more than its resources and capabilities can handle. This trend appears to exist across all administrations, Republican and Democratic alike. The reasons vary widely: policies are sometimes misunderstood, financial and human resources are inadequate, and accountable organizations are weak in structure and leadership.
We should not and cannot tolerate the expansion of a record of serious failures in public administration—not if we want to restore respect and trust in government, and respect for its mission.
Ronald Reagan, while pointing out the failures of government and deeming it excessive, also implicitly admitted that government is actually necessary. He certainly supports providing resources for national security, with the military and intelligence agencies taking a huge share of the federal budget. He did not campaign to end Social Security or some form of Medicare. Nor does he want to shut down agencies like the Centers for Disease Control and the National Institutes of Health, which protect us from epidemics and fund the research needed to identify, treat and prevent disease.
We can and should discuss the size of government, its remit, and which projects are worthy of financing.We also need an effective and fair tax system to pay for the programs we think we need.
These are all related to the political process. Once they are decided, they should be implemented by administration and management. More than 200 years ago, Alexander Hamilton pointed out in his "The Federalist Papers": Good administration is the key to good government. What is different today is complexity, rapidly changing technology, diversity of projects, intensity of political and lobbying pressure, etc.
70 years ago, the local government problems my father encountered were relatively simple. He prided himself on public service and doing his job well. As an engineer, he viewed government as a science, one that required rigorous training, expertise, and discipline to practice successfully. This methodology of his has served the citizens and taxpayers of his city well.
The U.S. government—local, state, and federal levels—spends close to 40% of our total economic output. How to identify our needs and how to meet them effectively is a huge challenge that requires special skills, sophisticated technology, and most importantly - good judgment.
To meet this challenge, the federal government employs about the same number of people today as it did when I joined the Kennedy Administration in 1962. (Meanwhile, the U.S. population has nearly doubled. Gross domestic product and federal spending have soared to more than 30 times what they were in 1962.) Today, government work relies on outsourcing, or outsourcing to private industry and some nonprofit organizations, for projects that range from repetitive and routine operations to some of the highest technical challenges imaginable—security, space, national health, the environment, and more.
Are we doing what we can and must do to reasonably ensure that these jobs are done well?
Who is really capable of judging which tasks can be outsourced? What work must you do yourself? How do we direct and supervise thousands of contractors? Of course, this requires education, experience, and most importantly, attention and emphasis on getting things done. Take the immediate challenge of infrastructure needs, for example, about which we say a lot but do very little.
What should we build or rebuild? To what extent do good public policies and efficiency gains rely on federal, state, local, and private efforts? Do we have the right managers? Have they received appropriate training and education?
Can we make a reliable estimate of the cost? The answer, I fear, is often no. This is not to say that successive governments have failed to pay lip service to the need for reform. In my experience, President Nixon emphasized “managing by objectives,” a fashionable approach among business consultants at the time.
President Carter praised "zero-based" budgeting. President Clinton tasked Vice President Al Gore with a more comprehensive effort to "reinvent government." George W. Bush undertook a major structural effort to merge related agencies into a new Department of Homeland Security but failed to maintain leadership competent to the requirements.
A century ago, we didn’t have opinion polls. Government is smaller and has narrower responsibilities. The technology at that time was quite "primitive" by today's standards. But complaints about government date back to the birth of the republic. Sometimes corruption undermines confidence in fairness and competence. Eventually a response emerges, often spreading over several administrations.
The assassination of President James Garfield in 1881 spurred civil service reform. The earliest independent institutions date back to the 19th century. Republican Theodore Roosevelt and Democrat Woodrow Wilson both held strong and distinct views on effective government, the former focusing on broad issues such as national parks and antitrust policy, and the latter focusing on government management, particularly the Federal Reserve.The New Deal of the 1930s, and Herbert Hoover at the behest of Presidents Truman and Eisenhower in the late 1940s and 1950s, largely established the organizational and personnel structure we have today.
Schools and especially universities play an important role in "good government". Public administration programs proliferate, especially at state-funded universities but also at some of the oldest and most established universities. Harvard, Princeton, and Yale—the Ivy League’s three behemoths—received large donations to develop new programs of their own.
Sadly, that energy and initiative developed over decades has been lost today. University endowments and professorships are more likely to be used for discussion of policy issues, including discussion and debate about the pros and cons of foreign and international affairs or social programs. National education policies, international cooperation and other challenging topics attract the attention of scholars and students. But policy alone, no matter how brilliantly conceived, will not solve the problem.
My request is simple. Ultimately, good policy depends on good management. This is the core tenet and mission of the nonpartisan Volcker Coalition, which I founded in 2013. By sponsoring research in public administration, and by bringing together leading public servants and administrative experts, we hope to explore new ways to foster more effective government at the federal, state, and local levels.
Fortunately, there is evidence that the challenges of public service remain attractive to at least a small group of talented young people who are either new to government service or just beginning to plan and design their careers. They share a common concern. Are there any relevant training programs for
? Are university courses relevant to new types of needs? Or even, is there consensus on the methods and talent required? How can new technologies, including big data, be applied to management problems? What should you do yourself and what should you outsource? Given today's technology and lifestyle, does the structure of the executive branch need to be seriously examined?
Earlier in this book I noted my deep disappointment at the response to the substantive recommendations made by the two National Public Service Commissions I chaired. In those days, we thought a silent crisis was brewing. Today, the crisis we are witnessing is no longer peaceful.
Today, amid the sound and fury of our nation’s politics—trust in government is eroding, and there is a clear need for cooperation among federal, state, and local governments. Technology raises the challenge - can this call for renewed interest in effective public administration be heeded?
Outlook
Unable to extricate myself, I ended this book with deep worries. The tide toward open democratic societies—the world in which I once lived and served—seems to be receding.
Parts of Europe are responding to authoritarian leadership. Some countries in Latin America are struggling to build sustainably strong democracies but still bear the burden of repeated economic collapse. The vast potential of Africa and Asia is often undermined by the "cancer of development" known as corruption. Perhaps most importantly, Asia's major powers appear determined to establish new economic and political models. In the United States, deep-seated economic, social and cultural divisions have eroded trust in the democratic process.
Attacks on the media and science – indeed on any kind of expertise or established facts – hinder our ability to lead. Key issues of environmental and immigration policy have not yet been fundamentally resolved. Long-established trade and national security institutions are increasingly under threat.
Today, perhaps it is time to remember the challenges our country has been faced with.In my 90 years of life, we have had the Great Depression, world wars, assassinations, unnecessary and counterproductive wars in places like Vietnam and the Middle East, vicious race relations, double-digit inflation, terrorist attacks...
My mother died in 1990, and she lived for nearly 100 years. I remember lamenting to her in my earlier moments of occasional despair: "Where is our proud country going? Why can't we get things done?"
Her answer to me remains the only compelling answer:
"America is the world A democratic country with a sound legal system in history. It has gone through a lot in 200 years, but it still survived. "
—End—
This article is adapted from "Unwavering"
.According to reports, the per capita income of residents in the area surrounding Washington is currently at the highest level. I don't know how many senators and representatives there are among these residents now, or what their incomes are. All I know is that they spend a lot of time "making phone calls asking for more dollars" to fund expensive campaigns and very little time in Washington engaging with colleagues, finding compromises, and building consensus.
Today, in this country, we face a huge challenge: restoring the public's sense of mission and trust in government. We urgently need reforms in the political process, and we need leaders who can lead us to reshape and preserve the great democratic consensus.
This can be a challenge for energetic people who are new to the world of politics. But as a now-advanced public servant, I have still been able to distill some key lessons from decades of public service, which I call “three truths.”
In fact, this is why I finally decided to write this book.
stable prices
Early in my second term as Fed chairman, a colleague complained at an Open Market Committee meeting that we were being accused of being "knee-jerk inflation warriors." I responded immediately that it was a "pretty good reputation" and showed we were making progress.
Trust in currency is fundamental to good government and economic growth. Given the role of the dollar and the U.S. financial system in the world, this impact extends far beyond the confines of our country.
Our monetary system, like those of almost all countries, relies on fiat currency. There is no gold or other valuable hard asset pegged to banknotes (or bank deposits) at a fixed exchange price. We implicitly take for granted the stability of our currency, or as it should be, that our currency can buy groceries, a house, or even a bond that promises to pay a certain amount of dollars in the future, today, tomorrow, and even into the future.
Maintaining such expectations and confidence is a basic responsibility of monetary policy. Once lost, the consequences will be serious and stability will be difficult to restore. Interest rates are rising, savings are being squeezed, and foreign exchange markets currencies are depreciating. Some traders and speculators may stand out, but working-class people and those on fixed incomes, like most retirees, will suffer.
In the 1970s, the United States experienced this kind of "stagflation", with price increases reaching the highest level in peaceful history. As is often the case, the inflationary process creates a vicious cycle, with expectations of rising prices leading to greater inflation. In the absence of other effective options, it was eventually wiped out by strong monetary policy. A severe recession is inevitable. Our experience with the failed anti-inflation attempts in the mid-1970s and the need for more sustained efforts in the early 1980s have repeatedly reminded us that once prices stabilize, they must remain stable.
Today’s environment is completely different. The generation that experienced stagflation is slowly passing away. By contrast, over the past 30 years we have maintained enough price stability that low or zero inflation expectations are ingrained in our thinking. Factors such as cheap imports from countries such as China have played a role, and our monetary authorities clearly understand the importance of maintaining price stability. There is no doubt that these firm expectations largely helped the United States absorb huge budget deficits and inject official liquidity on a large scale during and after the 2008 financial crisis without awakening inflationary forces.
One lesson my career has taught me is that such success can sow the seeds of its own destruction. I see country after country struggling to restore stability in the face of destructive inflation.Yet with victory in sight, the authorities relaxed controls and accepted "mild inflation" in the hope of stimulating further economic growth, ultimately causing the entire process to start over again. The tragic history of economic policy in much of Latin America provides too many examples.
The United States is not like Latin America, which has a history of frequent inflation, but the United States does face ongoing challenges with monetary and fiscal policy. Currently, while labor market pressures are increasing and the long-term expansion and full employment have not disrupted price stability, this is a critical period for monetary policy.
As I mentioned before, the late Bill Martin was famous for his central bank 's job is to "put away the blackjack when the party is getting good." A hard fact of life is that few hosts are willing to end a party prematurely—they wait too long, so by the time the risks become apparent, the real damage has already been done.
The central bank governor is the master of the "economic party". Too often, monetary restrictions - never popular - are delayed for too long. Once the inflationary process began, the challenges became more severe.
Today, after recognizing the need to regulate inflation, modern central banks, including the Federal Reserve, have reached a surprising consensus to set a new inflation rate policy "red line": in a carefully designed consumer price index, a 2% growth rate is acceptable, even desirable, but at the same time it is also the limit.
I'm confused about how it works. Years ago, there was no 2% goal or limit in my textbook. I don't know what the theory is for this. Being a goal and a limitation at the same time is difficult. If the inflation rate manages to stay at 2%, this means that the price level will double in a little more than a generation.
I do know some actual situations. No price index can accurately reflect actual changes in consumer prices that are only 1/10 or 1/4 percentage point. The different types of goods and services, changes in demand, and subtle changes in price and quality are too complex to allow precise calculations on a monthly or yearly basis. In addition, there is a tendency for prices to change as the economy grows or slows down, rising a bit during periods of economic expansion and falling a bit during periods of economic slowdown or recession, but not in sideways movements year after year.
However, as I write these words, with economic growth and unemployment approaching historic lows, people are starting to worry that consumer price growth is too slow - simply because it is about a quarter below the 2% target! Does this mean “easing” monetary policy, or at least delaying tightening, even when the economy is at full employment?
Of course, this is nonsense. How do central bankers fall into such a trap? Giving so much weight to small changes in a single statistic has its own inherent weaknesses. I think I know the root cause - this is not a question of theory or in-depth empirical research on for , but rather a very practical decision made by the relevant authorities in a distant place.
New Zealand is a small country famous for its trout fishing. So when I left the Federal Reserve in 1987, I happily accepted an invitation to visit. As it turns out, I was "scammed" in this regard. After getting off the plane in Auckland , I learned that the fishing season was over. Had I known this, I would have left my fly rod at home.
But in other respects the visit was fascinating. New Zealand's economic policy is undergoing fundamental changes. Years of high inflation, sluggish economic growth and rising foreign debt have led to a shift in favor of free markets and a fierce fight against inflation under the leadership of the traditional left-wing Labor Party.
The changes include narrowing the central bank's focus to a single goal: reducing inflation to a predetermined target. The new government has set an annual inflation rate of 0~2% as the central bank's main target.The simplicity of the goal is seen as part of its appeal - no excuses, no versus , one policy, one tool. Within a year or so, inflation dropped to around 2%.
New Zealand Central Bank Governor Donald Brash is like a traveling salesman, he has many customers. I thought about its appeal in practice when I read the discussion at the July 1996 Federal Open Market Committee meeting about the Fed's "price stability" goals. Janet Yellen asked Federal Reserve Chairman Alan Greenspan at the time: "How do you define price stability?" To me, he gave the only reasonable answer: "Expected changes in the general price level do not effectively alter the state of business or household decision-making."
Janet insisted, "Can you give me a number for this state?"
So Alan's general principles, which seemed to me to be entirely appropriate, were finally translated into a number. After all, those regression models computed by staff trained in econometrics must be fed by data, not principles.
I understand that a reasonable argument can be made for 2% as an upper limit for "stability". Some analysts pointed out that official price indexes often exaggerate price increases because they do not take into account that the quality of goods and services will improve over time. The analysis also pointed out that expectations and behavior are determined by the price of goods, which are suppressed by productivity improvements and fierce competition, rather than by the cost of services such as education and medical care, for which productivity improvements are slow.
But it is also true that the seeds of danger are sown. This seemingly precise number suggests that fiscal policy can be fine-tuned with more flexible targets as conditions change. If growth is too weak, maybe it could be raised to 3% to provide a little stimulus? If 3% is not enough, why not increase it to 4%?
I didn’t compile the numbers randomly. I occasionally read about such an idea being proposed by a Federal Reserve official or International Monetary Fund economist, and more often by economics professors. In Japan, this seems to be the new creed. I haven't heard anyone say that in a strong economy perhaps the inflation target should be lowered!
The fact is that even if this were desirable, monetary and fiscal policy tools do not allow for this degree of precision. Giving in to the temptation to "test the waters" will only weaken the commitment to stability that 's sound monetary policy requires.
Some of my Harvard professors declared a long time ago that slight inflation is a good thing for employment. This age-old belief persists, despite research and decades of experience from Nobel Prize winners in showing otherwise. In new, more sophisticated forms, what seems to be driving the debate is the fear of deflationary .
Deflation, is defined as a significant decrease in prices. If it continues long-term, that's a serious problem indeed. There has been no deflation in the United States for more than 80 years.
Indeed, nominal interest rates cannot fall significantly below zero. So, the argument goes, let's keep "a little inflation" - even in a recession - as a safeguard, a "backdoor" way of getting "real" interest rates negative. Consumers will be motivated to buy products today that may be more expensive tomorrow; borrowers will be tempted to borrow at zero or low interest rates to invest before prices rise further.
In my opinion, these views lack empirical support. However, concerns about deflation appear to have become widespread among officials and commentators. Even in July 1984, when my colleagues at the Federal Reserve and I were monitoring 4 percent inflation, the New York Times ran a front-page article about potential deflation. Actual deflation is rare.In reality, however, this fear can easily lead to policies that unintentionally increase risk.
History tells the story. In the United States, we had decades of good growth without inflation—the 1950s and early 1960s, and the 1990s until the early 2000s. Those stable years were followed by eight recessions, most of which were short-lived and did not lead to deflation.
We only experienced severe deflation once, in the 1930s. In 2008-2009, people had reason to worry about deflation. The common feature of these two events is the collapse of the financial system.
We cannot expect to prevent all financial excesses and recessions in the future. This is the historical pattern of free markets, financial innovation, and our innate “animal spirits.” To me, the lesson was very clear and profound. Deflation is the threat posed by a severe breakdown in the financial system. In the absence of systemic financial turbulence, not even the Great Recessions of 1975 and 1982, slow growth and cyclical recessions posed such risks.
The real danger comes from encouraging or inadvertently tolerating rising inflation and its close cousins of extreme speculation and risk-taking, namely standing by while bubbles and excesses threaten financial markets. But the irony is that "easy money" that strives to achieve "mild inflation" as a means of preventing deflation may in turn ultimately lead to deflation.
This is the basic lesson of monetary policy, which requires prudential supervision of price stability and the financial system. These two requirements will inevitably prompt and require the central bank to perform its duties.
Sound financial
Central banks have been around for a long time. Originally, they were designed to help government finance . They can also issue currency and provide some discipline to other banks. Alexander Hamilton The short-lived National Bank of the United States established by Alexander Hamilton is an example.
This early precursor to a central bank failed due to concerns that East Coast economic interests would stifle states' economic independence and growth. It was not until 1913, in the wake of an increasingly devastating banking crisis, that the United States established a true central bank to issue currency, rationalize bank reserve requirements, provide loans to banks, and impose state regulation. It took another 20 years for the new system to realize its full potential.
There are good reasons why the structure of the Federal Reserve System was designed to be as complex as it is, and remains that way. As an act of political compromise, the “system” seeks to balance unified policy with regional interests, independence with public responsibility, government control with private participation.
The Federal Reserve is also a controversial institution at times and by its very nature. The debate focuses more on policies and powers than on its unique organizational structure. But policy and organization are indeed inseparable. The key is "independence" - this was the first point I wrote in my notes in preparation for my first meeting with President Carter, and it was no accident. The second point I write about is “policy” – how this independence should be exercised.
The Fed is bound to cause controversy when it comes to implementing restrictive monetary policies and supervising financial institutions. That's why the system needs protection against what I call interest funneling or partisan political pressure. At the same time, the Fed is undoubtedly part of the government. Its authority derives from Congress's constitutional obligation to "coin money and regulate its value." It is not part of the executive branch subject to "presidential orders," no matter what James Baker said in 1984.
From the actual situation, 435 representatives and 100 senators cannot be responsible for the daily operations and policy decisions of the central bank. Congress also does not want to give this power to the president.Similar considerations have driven the creation of other so-called independent agencies, some of which are older than the Fed. However, no agency has the structural safeguards to preserve independence and the breadth of responsibilities that Congress has explicitly assigned over the years to match the Fed.
The U.S. Federal Reserve System is self-sufficient and has sufficient operating income.
html The 47 council members serve 14-year terms and can only be removed "for cause."
The chairman serves as a member of the Board of Directors with a term of 4 years.
12 Reserve Banks with operational and some policy responsibilities are located across the country. This model may seem strange today, but in 1913 it made political sense.
The presidents of the 12 regional reserve banks are appointed by the directors of each bank and approved by the U.S. Federal Reserve Board of Governors. The Federal Reserve Board of Governors appoints three of the nine directors to each regional reserve bank's board of directors, with the remaining six directors selected by private "member banks" but requiring them to represent a variety of interests and experience.
These all look complex on the outside. It’s hard to explain when your dining companion innocently asks, “What do you do?” It’s easy to be tempted to tinker with the structure of your organization. Do we really need 12 reserve banks? Are their current layouts (including two in and in Missouri) reasonable? Isn't it politically awkward that individual Reserve Banks are technically still owned by private member banks that are regulated by the Fed? Is the oft-cited suggestion that the U.S. Government Accountability Office should "audit" the Federal Reserve appropriate?
Each of us who has held important responsibilities has our own ideas about what kind of organizational change is logical. But change can quickly become a threat—one tinker inviting another. Beneath the seemingly innocuous proposals for reform, ulterior motives lurk.
Some in Congress often ask the Government Accountability Office to conduct audits of the Federal Reserve Board of Governors and the Federal Open Market Committee, but the true intent is clear. It is not about monitoring business efficiency and ensuring that expenses are accurately accounted for. The Federal Accountability Office has conducted an audit of the Federal Reserve's spending and has privately audited the spending of regional federal reserve banks. Rather, it is a game of influencing policy.
Large organizational issues do arise that require attention, not just for the Fed but for all agencies involved in banking and financial regulation. A series of financial institutions with overlapping powers and sometimes inconsistent policies are “historical accidents.” The Office of the Comptroller of the Currency was established during the Civil War when the National Bank's system was approved. In 1933, following the collapse of the banking industry during the Great Depression, state-chartered banks came under the supervision of the Federal Deposit Insurance Corporation. When created, the Federal Reserve had the same power over its member banks, whether national or state-chartered. It was not until the 1970s that it gained regulatory authority over all bank holding companies. Today, these companies have ownership stakes in large banks. The SEC has authority to regulate independent investment banks, even within bank holding companies, but it retains responsibility for regulating broker and agent functions and for regulating bank-like money market funds. Both the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission regulate derivatives. Insurance companies are regulated by the state. A range of new financial institutions, including hedge fund , do not have designated regulators.
Who is supervising the overall situation? Before the 2008 financial crisis, the honest answer was: no one. Because of the nature of its responsibilities with respect to monetary policy, bank holding companies, and overall financial stability, the Federal Reserve sometimes assumes or attempts to assume a leading role, but this depends on specific personalities and interests.
To some extent, the current answer is the Federal Stability Oversight Council, which created the Dodd-Frank Act in 2010. Backed by the finance minister, it was intended to promote coherence and cooperation among financial institutions, but it wasn't very effective. Efforts to strengthen common rule-making are valuable but insufficient. Importantly, the regulatory system created when traditional banks dominated financial markets was completely disconnected from the key elements of modern finance: companies driven by trading, securitization and derivatives. The new credit entity performs bank-like functions. Corporate debt levels are rising irreversibly beyond the reach of existing regulations.
As far as I know, there are no agency executives, bankers, and other experienced players who do not believe that there are serious overlaps and flaws in the current system. Its excesses and inconsistencies in oversight and enforcement leave the financial system vulnerable to manipulation and collapse. Those who are unaware of the frustrations of Treasury Secretary Paulson, Geithner, and Chairman Bernanke in dealing with the financial crisis cannot understand their laments.
So what should we do? In particular, what should we do about the Federal Reserve? It has the broadest responsibilities in law and practice. It alone manages monetary policy, controls the money supply and influences interest rates. It participates directly in the massive government securities market. It buys and sells with almost no restrictions to achieve its policy goals. It has direct regulatory authority over large bank holding companies. It maintains liaison with foreign monetary policy and regulatory authorities. In emergencies, it can marshal massive resources.
The scope of the Fed’s involvement in banking and financial markets—and the simple fact that it is viewed by Congress and the public as the “guardian of financial stability”—makes it natural that the Fed’s responsibilities actually go beyond those clearly outlined in the law.
Fed staffing has grown, and should grow, both in Washington and at regional reserve banks. This growth has gone beyond the regulation of commercial banks and regulated the financial system more broadly. But informal supervision, no matter how competent, cannot equate to clear responsibility and authority. Federal Reserve leadership, both at the Board of Governors and at the regional reserve banks, has at times been reluctant—or even opposed—to undertake regulatory efforts that could undermine its primary responsibility for monetary policy.
An anecdote from Janet Yellen, former chair of the Federal Reserve, illustrates this point again. In testimony to a government inquiry into the financial crisis, she was reminded that as president of the Federal Reserve Bank of San Francisco, she had expressed concern about the spread of subprime mortgages. San Francisco is a hot spot, so it is perhaps natural that Ms. Yellen focused relatively early on on a credit glut that had gone unnoticed elsewhere. This also demonstrates the importance of regional reserve banks.
The question naturally arises: "What did you do about it?" The answer, in short, is that the San Francisco Fed has no power. What about the Federal Reserve in Washington? Nor did it take notice, even as Yellen and one or two other insiders raised the issue (quietly). Didn’t these activities take place at bank holding companies regulated by the Federal Reserve? Yes, but typically in the non-bank sector, such as broker-dealers, where the primary regulators are other agencies.
In November 2010, Yellen explained in an interview with staff of the Financial Crisis Inquiry Committee: "We are focusing on the banking system, and I don't think we are paying enough attention to the risks of the entire financial system."
Okay! It didn’t take long for subprime mortgages to overturn the entire financial system!
As chairman of President Obama's Economic Recovery Advisory Council, I have a seat at the table in discussions about regulatory reform.I have experienced financial crises many times, and in addition to the unanimous consensus on the need for higher capital standards for commercial banks, extensive supervision of financial markets, orderly resolution or closure of failed banks by regulators, and compliance with the requirements for final liquidation, I have two special priorities.
is best known as the so-called " Volcker Rule ," which targets banks' proprietary (i.e., non-customer-driven) trading. The simple idea is that institutions that benefit from the protection of the federal safety net should not take advantage of the hard-won broad understanding and support of the public to speculate. During the crisis, the safety net's stated role has gone well beyond insuring retail deposits and providing Federal Reserve discounts to solvent banks. For example, the Troubled Asset Relief Program allowed the Treasury Department to use taxpayer dollars to stabilize financial institutions and even the auto industry. The new rules will be fleshed out through informal oversight, provided the five relevant agencies can agree on the necessary regulations.
The political reality is that each agency has its own leadership, staff, constituencies, and congressional committee oversight, and each agency has varying degrees of urgency for oversight and enforcement. In the case of the Volcker Rule, it took five years to reach consensus and adopt a regulation that ran into thousands of pages.
My other contribution is simpler and more direct. I believe the Federal Reserve needs to be prodded and equipped to effectively and sustainably discharge its broad responsibilities for the stability of the financial system. To secure attention, I propose that the President designate, and Congress confirm, one of the seven Fed Board of Governors members serve as Vice Chairman for Supervision. He or she will be directly accountable to Congress through a semiannual report on the state of the financial system.
This may be a bit embarrassing for the Fed chairman. However, responsibility for rulemaking and oversight will continue to rest with the President and the Board of Governors as a whole. Crucially, having one board member clearly responsible for oversight under the law should ensure that the system as a whole does not avoid oversight responsibilities.
It took a long time before this position was filled. Mr. Randall Quarles, I'd love to see how you handle this job.
The broader and more fundamental organizational issue is how to address the overlap and gaps between institutions.
The Volcker Alliance released a report outlining one possible approach. It will consolidate the supervisory functions of the financial system into a single entity, whose board of directors will include representatives of every relevant agency. The new entity may be led by, or closely related to, the Fed’s new vice chair for supervision. To maintain checks and balances, rulemaking (a supervisory function) may be led by the Federal Reserve and subject to review and comment by the Federal Stability Oversight Council or other agencies.
Obviously, there are some other methods to consider. Before the financial crisis, then-Treasury Secretary Paulson tried to develop a somewhat similar approach, with some success. After the financial crisis, the UK put the Bank of England in charge of the newly established Prudential Regulation Authority, essentially linking day-to-day regulatory powers with monetary policy. Other methods are also controversial within EU .
The key question is the extent to which the central bank should assume full responsibility for supervision, regulation and management. Effectiveness and efficiency need to be consolidated, and the need to obtain a variety of perspectives and checks and balances needs to be considered. However, since the central bank's intrinsic interest lies in market stability, the scope of its regulatory and supervisory responsibilities, and its relative independence from political pressure, it cannot and cannot reasonably withdraw from active participation.
The British experience is a vivid demonstration lesson. About 20 years ago, in an effort to restore the BoE's operational independence, its supervisory powers were given to a new sister agency. The practical result was a delay in recognizing potential market excesses and the fragility of the financial system if a little-known but aggressive bank failed. This is regrettable.
The UK government quickly reversed course and placed regulatory functions entirely back within the Bank of England remit.
Recently, a friend pointed out to me that the Federal Reserve is almost unique among major federal agencies in that its basic organization and responsibilities are not currently under threat from the Trump administration.
I think the Fed has actually been well respected by Congress and the president over the years. In an environment where trust in government is dangerously low, the Fed remains extremely trustworthy. As such, it is a national asset.
It is not unaccountable.
It is not error-free.
It does require the attention of Congress to ensure that it has the ability to maintain responsible and efficient stewardship of its responsibilities.
And, it does need to stay away from partisan politics.
All in all, it remains a valuable asset to the country during turbulent times.
Good Government
Good Government – This is a phrase we don’t hear very often today.
If we hear this phrase, we may think of Ronald Reagan's motto: "The problem is government." Before I close this book, I can say with absolute certainty: Our proud democratic government is indeed in trouble at every level.
Poll after poll has sent this message. Only about 20% trust the federal government to do the right thing most of the time. Congress fares even worse in terms of public opinion. Even the courts and the media, the so-called fourth branch of democratic government, have a bad reputation.
This is not just a matter of polls and popular opinion. In a paper written for the Volcker Alliance, renowned public administration professor Paul Wright noted that since the early 21st century to the present, the U.S. government has demonstrated 48 times problems that were sufficiently obvious to warrant significant national media interest. His examples include the failure to coordinate known intelligence beforehand when the 9/11 attacks could have been predicted; the inability to respond effectively to Hurricane Katrina in New Orleans; inadequate inspections of oil rigs in the Gulf of Mexico; and, in my field, the inability to understand and foresee the fragility of the financial system before the 2008 collapse. There have been many such examples since he published his paper in 2015.
I understand that in the complex, interdependent world we live in, some management errors are inevitable. There is a conflict between policies. Politics - crude electoral politics - affects government administration. But Professor Wright's careful analysis points to some distressing conclusions. The number of problems may also increase over time, possibly because the government is trying to do more than its resources and capabilities can handle. This trend appears to exist across all administrations, Republican and Democratic alike. The reasons vary widely: policies are sometimes misunderstood, financial and human resources are inadequate, and accountable organizations are weak in structure and leadership.
We should not and cannot tolerate the expansion of a record of serious failures in public administration—not if we want to restore respect and trust in government, and respect for its mission.
Ronald Reagan, while pointing out the failures of government and deeming it excessive, also implicitly admitted that government is actually necessary. He certainly supports providing resources for national security, with the military and intelligence agencies taking a huge share of the federal budget. He did not campaign to end Social Security or some form of Medicare. Nor does he want to shut down agencies like the Centers for Disease Control and the National Institutes of Health, which protect us from epidemics and fund the research needed to identify, treat and prevent disease.
We can and should discuss the size of government, its remit, and which projects are worthy of financing.We also need an effective and fair tax system to pay for the programs we think we need.
These are all related to the political process. Once they are decided, they should be implemented by administration and management. More than 200 years ago, Alexander Hamilton pointed out in his "The Federalist Papers": Good administration is the key to good government. What is different today is complexity, rapidly changing technology, diversity of projects, intensity of political and lobbying pressure, etc.
70 years ago, the local government problems my father encountered were relatively simple. He prided himself on public service and doing his job well. As an engineer, he viewed government as a science, one that required rigorous training, expertise, and discipline to practice successfully. This methodology of his has served the citizens and taxpayers of his city well.
The U.S. government—local, state, and federal levels—spends close to 40% of our total economic output. How to identify our needs and how to meet them effectively is a huge challenge that requires special skills, sophisticated technology, and most importantly - good judgment.
To meet this challenge, the federal government employs about the same number of people today as it did when I joined the Kennedy Administration in 1962. (Meanwhile, the U.S. population has nearly doubled. Gross domestic product and federal spending have soared to more than 30 times what they were in 1962.) Today, government work relies on outsourcing, or outsourcing to private industry and some nonprofit organizations, for projects that range from repetitive and routine operations to some of the highest technical challenges imaginable—security, space, national health, the environment, and more.
Are we doing what we can and must do to reasonably ensure that these jobs are done well?
Who is really capable of judging which tasks can be outsourced? What work must you do yourself? How do we direct and supervise thousands of contractors? Of course, this requires education, experience, and most importantly, attention and emphasis on getting things done. Take the immediate challenge of infrastructure needs, for example, about which we say a lot but do very little.
What should we build or rebuild? To what extent do good public policies and efficiency gains rely on federal, state, local, and private efforts? Do we have the right managers? Have they received appropriate training and education?
Can we make a reliable estimate of the cost? The answer, I fear, is often no. This is not to say that successive governments have failed to pay lip service to the need for reform. In my experience, President Nixon emphasized “managing by objectives,” a fashionable approach among business consultants at the time.
President Carter praised "zero-based" budgeting. President Clinton tasked Vice President Al Gore with a more comprehensive effort to "reinvent government." George W. Bush undertook a major structural effort to merge related agencies into a new Department of Homeland Security but failed to maintain leadership competent to the requirements.
A century ago, we didn’t have opinion polls. Government is smaller and has narrower responsibilities. The technology at that time was quite "primitive" by today's standards. But complaints about government date back to the birth of the republic. Sometimes corruption undermines confidence in fairness and competence. Eventually a response emerges, often spreading over several administrations.
The assassination of President James Garfield in 1881 spurred civil service reform. The earliest independent institutions date back to the 19th century. Republican Theodore Roosevelt and Democrat Woodrow Wilson both held strong and distinct views on effective government, the former focusing on broad issues such as national parks and antitrust policy, and the latter focusing on government management, particularly the Federal Reserve.The New Deal of the 1930s, and Herbert Hoover at the behest of Presidents Truman and Eisenhower in the late 1940s and 1950s, largely established the organizational and personnel structure we have today.
Schools and especially universities play an important role in "good government". Public administration programs proliferate, especially at state-funded universities but also at some of the oldest and most established universities. Harvard, Princeton, and Yale—the Ivy League’s three behemoths—received large donations to develop new programs of their own.
Sadly, that energy and initiative developed over decades has been lost today. University endowments and professorships are more likely to be used for discussion of policy issues, including discussion and debate about the pros and cons of foreign and international affairs or social programs. National education policies, international cooperation and other challenging topics attract the attention of scholars and students. But policy alone, no matter how brilliantly conceived, will not solve the problem.
My request is simple. Ultimately, good policy depends on good management. This is the core tenet and mission of the nonpartisan Volcker Coalition, which I founded in 2013. By sponsoring research in public administration, and by bringing together leading public servants and administrative experts, we hope to explore new ways to foster more effective government at the federal, state, and local levels.
Fortunately, there is evidence that the challenges of public service remain attractive to at least a small group of talented young people who are either new to government service or just beginning to plan and design their careers. They share a common concern. Are there any relevant training programs for
? Are university courses relevant to new types of needs? Or even, is there consensus on the methods and talent required? How can new technologies, including big data, be applied to management problems? What should you do yourself and what should you outsource? Given today's technology and lifestyle, does the structure of the executive branch need to be seriously examined?
Earlier in this book I noted my deep disappointment at the response to the substantive recommendations made by the two National Public Service Commissions I chaired. In those days, we thought a silent crisis was brewing. Today, the crisis we are witnessing is no longer peaceful.
Today, amid the sound and fury of our nation’s politics—trust in government is eroding, and there is a clear need for cooperation among federal, state, and local governments. Technology raises the challenge - can this call for renewed interest in effective public administration be heeded?
Outlook
Unable to extricate myself, I ended this book with deep worries. The tide toward open democratic societies—the world in which I once lived and served—seems to be receding.
Parts of Europe are responding to authoritarian leadership. Some countries in Latin America are struggling to build sustainably strong democracies but still bear the burden of repeated economic collapse. The vast potential of Africa and Asia is often undermined by the "cancer of development" known as corruption. Perhaps most importantly, Asia's major powers appear determined to establish new economic and political models. In the United States, deep-seated economic, social and cultural divisions have eroded trust in the democratic process.
Attacks on the media and science – indeed on any kind of expertise or established facts – hinder our ability to lead. Key issues of environmental and immigration policy have not yet been fundamentally resolved. Long-established trade and national security institutions are increasingly under threat.
Today, perhaps it is time to remember the challenges our country has been faced with.In my 90 years of life, we have had the Great Depression, world wars, assassinations, unnecessary and counterproductive wars in places like Vietnam and the Middle East, vicious race relations, double-digit inflation, terrorist attacks...
My mother died in 1990, and she lived for nearly 100 years. I remember lamenting to her in my earlier moments of occasional despair: "Where is our proud country going? Why can't we get things done?"
Her answer to me remains the only compelling answer:
"America is the world A democratic country with a sound legal system in history. It has gone through a lot in 200 years, but it still survived. "
—End—
This article is adapted from "Unwavering"
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