He guided U.S. monetary policy and finance for nearly three decades. He waged war against inflation and left behind a legacy that you could write an entire college textbook on. Paul Volcker, the former Federal Reserve Chairman, died on Monday at the age of 92. After his appointment as chair of the Federal Reserve in 1979, Volcker combatted inflation by dramatically raising interest rates.
During his tenure, the Federal Reserve raised interest rates to more than 20% in 1981, an increase Volcker insisted was necessary to bring an end to the rapid inflation then plaguing the U.S., but managed to piss off the rest of the industry.
Unfortunately, the move drove the U.S. into recession, but Volcker was credited with setting up the standards necessary for long-term growth for banks.
“People thought they’d never buy a home again, and they did,” Diane Swonk, chief economist at Grant Thornton told CNBC.
Volcker allowed the fed funds rate, now topped out at 1.75%, to rise over 20%, and with it went the interest on home mortgages and everything else. The 30-year mortgage rate spiked into the high teens in late 1981 and continued at double digits until 1990.
“What was amazing was the back-to-back recessions of 1981 and 1982, which he used to break the back of inflation,” Swonk added. “He tightened policy, and brought the economy to its knees. He flipped the switch again, and the economy powered forward in a way it hasn’t since.”
More recently, he was advising former U.S. President Barack Obama on bank regulation following the 2008 financial crisis, oversaw the return of money to Holocaust victims, and investigated the United Nations oil-for-food program.
Leading the central bank from 1979 to 1987, Volcker was and has remained a giant in the financial world—literally and figuratively. At 6-feet-7 inches, Volcker aggressively fought against inflation and instilled the “Volcker Rule,” which to the customer’s benefit, protects them against banks using customer deposits to make speculative short-term trades for their own profit.
But for many years, “well-compensated industry lobbyists have long sought to weaken the Volcker Rule, claiming it has reduced market liquidity and gravely damages the prospects for economic growth,” Volcker once wrote. “Yet credible studies show that overall market liquidity remains strong and has increased in recent years.”
The Birth of the Volcker RuleEmbed from Getty Images
Since July 2015, banks have been required to comply with the Volcker Rule—but five years after Dodd-Frank passed. Why? You can thank big bank lobbyists for that delay and attribute its eventual passing to the late and former Federal Reserve Chair, Paul Volcker.
Part of Section 619 of the Dodd-Frank Wall Street Reform Act of 2010, the Volcker Rule prohibits banks from using customer deposits for their own profit. In other words, they cannot own, invest in, or sponsor hedge funds, private equity funds, or other trading operations for their own private use.
How the Volcker Rule Impacts You
Passed to directly address and undo the damage done when Congress repealed the Glass-Steagall Act, the Volcker Rule serves to benefit consumers in six ways:
- Your bank deposits are safer, because they aren’t gambling money for banks;
- However unlikely, banks are less likely to require another $700 billion bailout, which would require your personal funds;
- Big banks no longer can leverage your investments and put it towards risky hedge funds to improve its profit;
- Local banks can compete fairly as against bigger banks—allowing for these community banks to more often, lend out to small businesses;
- You won’t wake up to learn another “Lehman Brothers” has failed—for more on that, feel free to learn more about how Brock Pierce is strategizing away from another “Lehman Brothers” scenario; and
- Holding high-ranking bank executives accountable for their mistakes and crimes.
Volcker, 92, was named Fed chairman in 1979 by President Jimmy Carter, and reappointed by President Ronald Reagan in 1983 and served until 1987.
“His life exemplified the highest ideals – integrity, courage, and a commitment to do what was best for all Americans,” current Federal Reserve Chair Jerome Powell said in a statement.