STAFF NEWS & ANALYSIS
Obama Taps Volcker to Head Panel on Crisis
By - November 27, 2008

President-elect Barack Obama on Wednesday tapped former Federal Reserve Chairman Paul Volcker to head an advisory panel on the financial crisis. Obama also said University of Chicago economist Austan Goolsbee, a top adviser during the campaign, would serve as a member of the White House Council of Economic Advisers and as staff director for the panel Volcker will chair. – Market Watch

Dominant Social Theme: Volcker to the rescue!

Free-Market Analysis: So who is Paul Volcker. He is the consummate insider's insider. As chairman of the Federal Reserve in the late 1970s he tightened interest rates until the American economy (and therefore the world's) squeaked and in the process managed to create a two year Western "recession" that stands as the worst of its kind until this one. The idea that Barack Obama stands for "change" is increasingly difficult to fathom given these kinds of appointments. This is the same gene pool that spawned Alan Greenspan and seemingly every other economic appointment that Obama has made recently. Here's some more on Volcker from Wikipedia:

As of October 2006, he is the current Chairman of the Board of Trustees of the influential Washington-based financial advisory body, the Group of Thirty, and is a member of the Trilateral Commission. He has had a long association with the Rockefeller family, not only with his positions at Chase Bank and the Trilateral Commission, but also through membership of the Trust Committee of Rockefeller Group, Inc. (RGI), which he joined in 1987. That entity managed, at one time, the Rockefeller Center on behalf of the numerous members of the Rockefeller clan. He currently serves as Chairman of the Board of Trustees of the International House in Manhattan, NY. He was a founding member of the Trilateral Commission. In January 2008, he endorsed Democratic Presidential Candidate Barack Obama for President. On April 8, 2008, he was the featured speaker at "The Economic Club of New York" and spoke about the issues and causes of the 2008 US recession, and critiqued the 2008 US financial system and the 2008 Federal Reserve policies.

Many of the top people on Obama's staff evidently have some sort of connection to the Rockefellers – even though that family is usually conflated with the Democrats. Anyway, it will be interesting (though not in a comfortable way) to see the twists and turns of monetary policy under the "president-elect." With Volcker's appointment, Obama has set up a team that has a variety of viewpoints on how to correct the current crisis. Current Fed Chairman Ben Bernanke is well known for his inflationary sympathies as regards dealing with financial crises. So on the same team, one individual favors a pro-active inflationary approach to the current problems and the other, Volcker, is known for his take-no-prisoners attitude toward inflation once it has shown up as animating economic force. Here's something on Bernanke:

In 2002, when the word "deflation" began appearing in the business news, Bernanke gave a speech about deflation. In that speech, he mentioned that the government in a fiat money system owns the physical means of creating money. Control of the means of production for money implies that the government can always avoid deflation by simply issuing more money. (He referred to a statement made by Milton Friedman about using a "helicopter drop" of money into the economy to fight deflation.) Bernanke's critics have since referred to him as "Helicopter Ben" or to his "helicopter printing press". In a footnote to his speech, Bernanke noted that "people know that inflation erodes the real value of the government's debt and, therefore, that it is in the interest of the government to create some inflation."

Remember Volcker made his reputation by being very tough on inflation. There are perhaps two competing strands of thought here – or perhaps more accurately serial intentions: first inflate and then squeeze. Given the players Obama has gathered around him, a perfectly adequate supposition would be that these folks intend to pour money into the financial economy (as opposed to the "real" economy) until the financial institutions at risk right themselves. The stock market will stabilize, to a degree, gold and silver will go sky high and inflation. Once having salvaged what should be unsalvageable, inflation will become target one. And there will be only one choice if inflation gets "out of control." What is the single alternative? Deal with inflation in some way, either through a dramatic revaluation of the dollar or by merging it with other currencies or by squeezing rates and the money supply. Door one, Door Two, Door Three …

The pattern of economic survivability now being charted by Obama, and by outgoing President George Bush as well, now comes clearer. The hysteria surrounding these "bailouts" are likely intended to justify the enormous outlay of cash by the Federal Reserve to prop up the banking system after decades of profligacy. But the Fed cannot just inflate – it needs political cover, a political consensus, in other words. That was provided by the vote to create the initial bailout drawn from taxpayer dollars. Now the Democratic Congress will go back to work on another bailout aimed at the "average worker." This will essentially provide a safety net of fairly useless jobs, but will allow the Obama administration to offer up a number of talking points and to organize a "New Deal" mythos.

We are saddened that all the activity in Washington really seems aimed at saving the current Western banking system. Once the system is stabilized, inflation will likely become a bigger problem; and the metals markets will show the way with higher prices – maybe much higher. At this point, individuals like Volcker will sound the drumbeat for "wringing out inflation." Who knows how that would occur? We have a sneaking suspicion that the powers-that-be see the dollar as an impediment to a larger one world financial system, so massive inflation would certainly bring renewed calls – among other suggestions – for some sort of North American currency similar to the European euro.

After Thoughts

In any event, in this sort of scenario, the average American consumer is likely to get a kind of monetary whiplash. The bailouts will stabilize the financial sector, not the Middle Class. And then, if there are renewed regulatory pressures, someone like Volcker might lead the charge to renewed tightening. The tightening would only come at a time when the financial system could stand it – but that doesn't mean the hard-pressed citizens of the Western world would be able to stand it as well. They may go from make-work to no work. Or further make work of an even more tenuous variety. The obvious panic that the monetary elite has shown in the past months has been for ensuring the financial system doesn't topple. But securing the banking system is not the same as securing Western middle classes, Obama's rhetoric notwithstanding. Volcker's appointment, along with others on the Obama team, would tend to show that.

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