Speech

PLEASE CREDIT ANY QUOTES OR EXCERPTS FROM THIS ABC NEWS RADIO AMD TELEVISION PROGRAM TO "ADC NEWS' ISSUES AND ANSWERS." ABC NEWS ISSUES AND ANSWERS Sunday, August 30, 1981 A half hour news interview program produced and broadcast over ADC-TV and ADC Radio 12:00 Noon - 12:30 PM, EDT GUEST: PAUL VOLCKER Chairman of the Board of Governors Federal Reserve CORRESPONDENTS: Sam Donaldson - ABC News Dan Cordtz - ABC News PRODUCER; Peggy Whedon © 1901 American Broadcasting Companies, Inc. All Rights Reserved T1r anscript by: RLS Reporting Associates, Inc. 8 50 Sligo Avenue Silver Soring, Maryland 20910 (301) 587-9235 1 ANNOUNCERS From New York City, ABC News brings you ISSUES AND ANSWERS. MR. DONALDSON: Paul Volcker, the Chairman of the Federal Reserve Board, the man in charge of the tight money policy. Interest rates are high and consumer prices are soaring. New housing con- structions are down 17 percent. Mortgage rates are up to a stagger- lr*g 17 percent. Thousands of automobile dealers have closed down and 150,000 automobile workers are out of work. Eighty percent of the savings and loan associations are operating in the red and many are in danger of failing. Along with the bad news about climbing consumer prices, the stock market has fallen more than a hundred points in two m°nths. The issue is, how long can the United States suffer high interest rates in the name of fighting inflation without sliding into a recession? I'm S?ra Donaldson, ABC News Chief White House Correspondent, and with me is ABC News Economics Editor Dan Cordtz. We'll be back our interview with Chairman of the Federal Reserve Board Paul v°lcker after this message. (Announcements) MR. DONALDSON: Our guest is Chairman of the Federal Reserve Bo -ard Paul Volcker. Welcome Mr. Volcker and let me begin by saying that President Reagan last week said that high interest rates are Siting his administration and what he is trying to do with the ec°nemy as much as it is hurting everyone else. Your Board is rQ3Ponsible, to a great extent, by keeping money tight for those 2 high interest rates. So my question is, are you going to let up are you going to keep it up? MR. VOLCKER: Well, first of all, I would not say that we responsible for the high interest rates. In a fundamental sense, inflation is responsible for the high interest rates. We have, as you well know, a very difficult problem in this country. for the first time in our history, really, have had an inflation that has persisted over a decade. The longer people have come to G*pect that inflation, among other things, lenders and borrowers have come to expect the inflation, so they go ahead and borrow a i°t of money, lenders want to get a fair return on their money, and you have a problem, a very real problem, in the market of high interest rates. Among other things, the United States Government itself is Preempting a lot of that credit that's available, through big budget- arY deficits. So we have a culmination here of a good many problems that have been developing over a good many years and we are not going to deal with that interest rate problem, in my opinion, without baling with the inflation. And, of course, that's what we are tr?ing to do. We are restraining the supply of money and credit. There's a iot of demand for money and credit. At the moment that means high interest rates. But it is a symptom of the inflationary situation. MR DONALDSONi Dut the Secretary of the Treasury Donald 0 ^e9an says that if you don't let up he fears we may have a very deep ^cession, 3 MR, VOLCKER: I don't think there is any disagreement here and I don't know as he expressed concern about a very deep recession. We have a policy of restraint on money and credit. have a kind of collision in the markets between very heavy demands for money and credit and the restraint which I believe is necessary to brine the inflation rate down. It'a not a pleasant situation. It's not a happy situation. ^U I would claim is it is part of the process by which eventually inflation is going to be dealt with and we can see some signs of that already. We can see some more hopeful signs and fundamentally that points toward a healthier economy in the future. But we have Q rough period to go through here. MR. CORDTZ: You said there isn't any basic disagreement but there are some economists who contend that there is a sort of a b*sic incompatibility between Reaganomics and a tight money policy that is, that the supply side economic approach is supposed to simulate the economy whereas you at the Fed are involved in trying to dampen it down. What do you think about that? MR. VOLCKER: Well, I think there is, putting the point Mother way, a very heavy burden on monetary policy now in terms o f the inflationary situation, which is fundamental. So much of th e responsibility for curtailing inflation falls back on monetary poUcy that gets reflected among other things and higher and Merest rates. Now, you say an incompatibility in the policies. I would that's true if we don't go ahead and do what I believe is necessary on the spending side. We just had a big tax cut. Part °f the justification of that tax cut was to put pressure, quite directly, on the Congress, the American public, to reduce expendi- tures, to bring expenditures down from an accelerating curve that they've been on for some time. Now the tax cut is passed, it has Passed with widespread support. It will bring benefits, I think, incentives. It will bring benefits in reducing costs, if we Accept the corollary which is to keep expenditures under control. I think that was stated at the time and it is a very large challenge, to get the expenditure side of the budget now down to match the tax receipts side. MR. CORDTZ; Is it your judgment that what's been happening ln the stock and -bond market and financial community generally is a reflection of fears that this budget deficit has come out too high? MR. VOLCKER: I think that is certainly part of it and that has tended to mount, I think, in recent weeks. More funda- mentall there is all the doubt and uncertainty about whether we y are really going to be successful in dealing with this inflation pr°blem, as we must* So it is a combination of the two, I think, account for the problems in the financial markets. MR. DONALDSON: So what you are telling us, from your side, th e monetary side, you're going to keep the screws on? MR. VOLCKERs No question. We have to keep restraining th G growth of money and credit. MR. DONALDSONS And you are telling us, from the fiscal they are going to have to balance the budget in the sense of 5 finding deeper cuts. Now there is a study, two or three of them, that say that this fiscal '82 budget deficit will not be $4 2-1/2 billion as the President forcasts. It will be closer to sixty. Do you agree? MR. VOLCKER: Well, I think if there are no further expendi- ture cuts, there are no further efforts at reducing expenditures, the chances are that that deficit could be bigger. And I would not focus just on "82. The budget in the short run is affected, and importantly, by what is happening in the economy. Put we have to look out beyond '82 and '83 and '84, as I think the Administration done, and get the expenditures on a trend that is croina to have a declining trend of deficits. MR. DONALDSON; Clearly, if we are twenty billion over the forecast for '82, if it turns out that way, then the off-years of 83 and '84 have a rebound effect. MR. VOLCKER: There's no question about it. MR. DONALDSON: You couldn't possibly balance it by '34. MR. VOLCKER: There is no question. We've got to get to Work on that. We've already gotten to work, or the Administration has and the Congress has. They've already had, against our past history, sizeable expenditure cut. I think what was clear all a al°ng and it is certainly clear now is that's a downpayment on the CUts that are going to be needed as we go ahead. MR. DONALDSON: Now, Mr. Volcker, you know something about Polj tics as well as about money. Where is President Reagan going to find more cuts? It is either going to be in the Defense budget or it's going to be in the entitlement programs such as Social Security. MR. VOLCKER; Well, you still have a $700 billion budget. That's a lot of money to run the Government on* There's a lot of room for cutting. I have no expertise and a lot of political decisions appear in questions of where to cut. I find it hard to believe that there is no room for economies in the Defense program. And that's a big part of the budget. You are going to have to look bQyond that. You're not going to find all the cuts there, consistent with the kind of Defense build-up the country seems to want. MR. DONALDSON; Social Security? MR. VOLCKER; I think you, you can't really start this Process, in my opinion, by saying, I am going to exempt any large Part of the budget. You've got to look at it all. Social Security •j ^ problem of its own, in terms of just looking at the receipts and payments involved in the Social Security program, as one goes °ut- So I think it is pretty well known that things have to be lo°'ked at in that area. I don't suggest any particular area within s°cial Security, but that does have problems. MR. CORDTZ: There have been some published suggestions, by c^lumnists among others, that when President Reagan comes back he« . s going to want to take you to the wood shed and talk about m°netary policy. Suppose he asks you to let up, what will you say to hi m? MR. VOLCKER; Well, you know, I read some of these stories. e have communication with the Administration all the time and I 7 think in broad terms we've been on the same wave length in monetary Policy and I think there's been a very healthy realization on the Part of the Administration that restraint on money and credit is essential to their own programs, to their own expectations. So I don't see any conflict arising in that area. MR. CORDTZ: In theory, these high interest rates are supposed to help bring down the inflation rate, but in last month's CpI, high interest rates played a rather large role in driving those ^umbers up still higher. Are we in a kind of a no-win situation? MR. VOLCKER: No. I think those Consumer Price Index ^umbers, as many other index numbers, are subject to gyrations from m°nth to month. I think the evidence in the past five or six ^nths has been a little progress, a little turning the corner on inflation, which is a long ways from home, but it's a hopeful sign, I think there are problems in the way th6 Consumer Price Index is calculated, the home buying area in particular. Almost indications of home prices now show a slower rate of increase or an actual decline but in the Consumer Price Index the particular number used shows in increase. MRo DONALDSON: Mr. Volcker, that's true, but we are in a very sluggish period in our economy, just kind of on the edge, many economists feel, of a recession, de jure type recession, as ^e two-quarter definition is given. Do you think we will go into a recession before we come out of this trough? MR„ VOLCKER: I think there are many more predictions of rQcession in the past three or four years than recessions that 8 have actually happened. I don't exclude the possibility. You could have a decline in the gross national product for a quarter or two. We had a decline in the second quarter. But I don't think we can conduct policy on guesses, which is all they are, about whether you may have a recession in the next quarter or two. Most of those guesses have been wrong in the past. And our major problem is dealing with the inflation. We're going to have ttore recessions over a period of time and a worse economic perform- ance, I'm not talking about 1982. I am talking about 1983, 1984, the rest of the 1980s, if we don't deal with this inflation problem. There has been, I think, a significant correlation, unfortunately, between rising levels of inflation in the past decade and poorer economic performance. MR. DONALDSON; Well, now, you talk about, we can't do it °n guesses. Howard Baker, who is the Senate Majority Leader, a Republican, a very good, a strong supporter of President Reagan, calls Reagan economics a riverboat gamble, and many of Mr. Reagan's ^visors will say approximately the same thing. Do you think it is a gamble? Do you think we are gambling with the economic future of this country? MR. VOLCKER: Well, I suppose what he may have had in mind is the fact that, for the first time in recent years, anyway, we put a big tax reduction. MR. DONALDSON: And indexed it. MR. VOLCKER: And indexed it so that it doesn't generate inflationary tax revenues in the future. That has been done, in my 9 opinion, and I presume in Senator Baker's opinion, without yet having in place all the expenditure reductions that are the comple- ment of that tax reduction. So in that sense, I suppose it is fair to say -- I don't like to use the word "gambling" — but we have to wait for those expenditure cuts. We have to make good on the implicit pledge that the expenditure cuts will come in. MR. DONALDSON: When you and Dan referred to that a moment a9o, is that why Wall Street isn't backing the Reagan program? MR. VOLCKER; I think it is one -- I don't know whether 1 would phrase it or not "backing the program" — I think there doubts on that score. MR. DONALDSON; Well, how much longer will these doubts Persist? Will the stock market just keep going down? MR. VOLCKER% I think after years of disappointment, disappointment in pledges to balance the budget, after years of disappointment and hoping that inflation would come down and seeing Programs to bring inflation down, they didn't see that happen. So there's a certain natural skepticism out there and we've got to work through that skepticism. I don't happen to think that skepticism is justified but nobody's word is going to do it. they're going to have to see results over a period of time. MR. DONALDSON: Before we take a break, let me ask one more time, will the stock market keep going down? MR. VOLCKER; Markets never keep going down. MR. DONALDSON: The bears and bulls trade off. On that note, we will take a break. We'll be back in a 10 moment with more ISSUES AND ANSWERS, (Announcements) MR. DONALDSONt Our guest is Chairman of the Federal Reserve Hoard Paul Volcker and we resume our questioning of Mr. Volcker today with ABC Economics Editor Dan Corctz. MR. CORDTZ: Mr. Volcker, some people have suggested that even if the Fed loosened up on the purse strings and let the money supply go that it would disillusion so many bond buyers and others that interest rates would shoot up again rather than cone down. Are in a hopeless situation here? MR. VOLCKER; Well, I don't think it is at all hopeless. 1 think that situation reflects an understanding that the basic sickness, the basic ill, in the bond markets, the basic ill in the economy is inflation. So people in the bond market certainly don't welcome action that they interpret as permitting inflation to Persist or increase and they would react to that adversely. I think there is an element of truth, there is an element of reality in th^t story. MR. CORDTZ.- Well, at the moment, lenders are demanding and letting a premium over and above the inflation rate that is absolute- ly unprecedented. How do you explain that? MR. VOLCKER; Well, it's not unprecedented. If you go back lnto history, over long periods of history, you will find other Periods of high real interest rates of this sort. And of course We have never had, looking at the whole sweep of history, such high t ^ * rates that impinge upon the reality of these interest rates . 11 ^hen you can deduct it from your tax payments or from your income in calculating your tax, that takes the bite out of the interest rate for a good many people and lowers the effective rate. But I think the high, relatively high real interest rate is unusual in one Respect. Usually when we have inflation, in the past, real interest rates have been low. I think that reflects the fact that people have n°t expected the inflation to persist. We have never had, in our history, a peacetime inflation of this sort that people expected to persist. It took them a long time to become convinced that inflation was going to continue. Now, I think they may be exaggerating the persistence of inflation, but that undoubtedly is on a lot of people's minds. So they want to Protect themselves and they want to protect themselves when they ^end money. On the other hand, the borrower is apparently willing to the high rates, in many instances, because he has the illusion that he can pay it back in cheap dollars. MR. CORDTZ: There have been some critics who suggested that the Fed simply hasn't been able to hold down the money supply the way it presumably wants to, that the fluctuations have been and down and that you have't been able to stick to a target. Is there any validity in that? MR. VOLCKER; Well, you've got a lot of fluctuations in the m°ney supply figure on a week-to-week basis. You have about a half triiii dollars a day of payments made in dollars around the on V°rld and all of that goes through somebody's bank account and I 12 think it's a little too much to expect that that money supply figure, which reflects all those bank accounts, is going to be stable on a week-to-week basis. We've had some fluctuations recently. The trend has been quite moderate this year. I brought along a little chart if you'd like to look at it. This red line shows the week-to-week fluctuations which have been quite marked, as you can see, in the last couple of weeks. You put a trend through that, the growth in the money supply this year — this is M-l, one of the measures of the money supply, has been between one and two Percent, a very modest number. It shows no particular tendency to accelerate. And that reflects our effort — and I think quite successful effort — this year, to maintain moderate growth in the money supply. MR. DONALDSON; Let's ask about interest rates that people can get. Their savings institutions which are now offering certi- ficates and in the future - I think October 1st for the start - with 25 and 35 percent rates of returns. Are those good deals? MR. VOLCKER: Well, when you see those extraordinarily high interest rates for a limited period of time, they appear to be tied in with a promise to acquire one of the so-called all savers certificates, a tax exempt certificate. I don't quite know what the rate will be because it is related to the Treasury Dill rate at the time. But some institutions are saying, we will pay you these extraordinary interest rates for a month if you promise to buy an all savers certificate from us October 1st, when they come 13 into force. I think there are very definite questions in my mind as to whether that particular practice, of the tie-in deal, does not really violate what the Congress had in mind in passing -- MR. DONALDSON: Are you talking about questions at the IRS? MR. VOLCKER: Well, the IRS has raised a question about it, I see, a question in terms of enforcing the interest rate ceiling which is part of that legislation. So, I do have a very definite question on the special tie-in deals. MR. DONALDSON: Let's go back to 19 33. Or, I guess the Question is, should we go back to 19 33 and go back on the gold standard? A lot of people — some of them in the Reagan Adminis- tration, Jack Kemp in Congress — say that's exactly what we should do. MR. VOLCKER: Well, to the extent this kind of longing or talk about the gold standard reflects a recognition that we need disciplined financial policies, and look to gold for a kind of discipline, I think one can recognize the validity in a sense of Poking for some method to enforce discipline. I'm afraid there also is a large element in some of this talk, I see, of kind of Wlshful thinking, that somehow there is some magic pill out there that we can take and if we only go back to the gold standard or a big tax cut or whatever the remedy is, we're going to get °ut of all our problems painlessly and easily. That, I think,is an illusion. Don't forget that only ten years ago, the popular 14 notion among almost all economists was to get off the gold standard. That was going to solve all the problems. It didn't solve all the Problems either to get off the gold standard or get on the gold standard. We have very real problems. We do need discipline in financial policies and budgetary policies, in monetary policies, and I hope and expect that's what we are getting. MR. DONALDSON: Yes, but what do you think? If the President calls you up and says, Mr. Volcker, I need your advice. Should we try and go back on the gold standard? What would you say? MR. VOLCKER: I would not recommend going back on the gold standard at this point. MR. DONALDSON: You would say, poppycock? MR. VOLCKER: I wouldn't use that particular word but I w°uld not endorse -- MR. DONALDSON: Not to put words in your mouth, what would say to him? MR. VOLCKER: I would say, the gold standard has not been successful in the past, in preventing economic instability. We Were on the gold standard — as you say, go back to 19 33 — we were °n the gold standard in 1933 when we got into problems. The price of gold was increased. That didn't cure the problems, but there a popular theory at the time that that would cure the problems. There isn't going to be any, there is no laetrile to cure this Problem of this inflation, this kind of — this has been kind of a cancer on the economic scene. Discipline policies, yes, but magic solutions, no. 15 MR. CORDTZ: Well, I don't want to put any words in your roouth, but you seem to be saying that we really have to suffer a great deal of economic pain to get out of this. MR. VOLCKER : Well, I have never said that this process ls a painless one. People have to change their expectations and change their behavior and that's always an uncomfortable process, Wages — you can't have inflation coming down, being eliminated, and have wage rates which are two-thirds of cost, increasing at ten percent or so, the way they are. So, we've got to affect People's behavior, affect people's thinking, to the point that they have an incentive and a recognition that we will all be better off to conduct ourselves in a non-inflationary way. In a sense, the pressures on financial markets push us in that direction. That's all rationality. And I think we see some Sl9ns, early yet, but some signs of improvement. MR. DONALDSON; Yes, but, it's not just getting a smaller Wage increase, A lot of people are thrown out of work. The inflation rate is certainly going to go up. How high do you think? Hov high can this country tolerate it? MR. VOLCKER: I think the inflation rate, we see some signs, is coming down. MR. DONALDSON: Why? MR. VOLCKER: I think in large part because the Federal serve policy has been restrained and restrictive. I think when look beyond all the surface things, there's been a certain ^m°unt of fortuitous developments, luck. We had some rain in the 16 spring when a lot of people feared that wg wouldn't. We are having better crops than people expected. That helps food prices. Fcr the moment, at least, we have more stability in energy prices. Even that may be affected to some extent by a sense of financial restric- tion. Dut let me — MR. DONALDSON: Do you mean in the shortrun a continuation of a tight money policy and a — cutting the Federal budget further - would somehow in the shortrun reduce the inflation, the unemploy- ment rate? MR. VOLCKER: We're not playing for the shortrun. We are laying for what makes the economy solvent in 1980. MR. DONALDSON: But people have to put food on their table every night. MR. VOLCKER: That is right. Actually, the economy, one of the surprising things is the economy has been doing — I don't •LikG to say so well — some sectors of the economy, you mentioned at the beginning of the program, are doing very poorly. They are Qn the whipend of this. They are more affected by credit shortages th an other parts of the economy. The level of the economy as a is higher than almost any economist would have projected Si months or nine months ago. That's a surprising thing but it is n -c tact, that the economy has moved better, against these very interest rates, than most economists' expectations six or nine m°nths ago, when there was also a lot of talk about, there was going to K another recession next quarter. 17 MR. CORDTZ; It seems to me that the most visible effects of the high interest rate are down on Wall Street. Is Wall Street a good guide for public policy? MR. VOLCKER; Oh, I think Wall Street reflects the hopes and fears of people all over the country and all over the world about what the future brings. They are dealing in futures all the time. What's tomorrow going to bring? What's next year going to bring? Xt is also subject to exaggerated movements. Dut I think it is fair to say, i take it as a sign that there is still a lot of doubt, a i°t of uncertainty, a lot of concern about the budgetary picture, lot of concern about economic policy in general, concern focused 0r* whether we are going to be successful in dealing with inflation, whether we are going to stick with it, in the simple term. And my message there would be, yes, we intend to stick with it. MR. DONALDSON: That's the Fed. What about the Reagan ^^ministration? Fifteen seconds left. Will they stick with it? Will they make those cuts? MR„ VOLCKER: I think that — MR. DONALDSON: They have an election in 582. MR. VOLCKER: They have an election but they have a program xt seems to me those cuts are integral to their own program and they've said so right along, so I am hopeful that they are J n<3 to follow up the very good start they already made and push 18 MR„ DONALDSON: Thank you, very much, Chairman Volcker, and Dan Cordtz, for being with us today on ISSUES AND ANSWERS. (Announcements) ANNOUNCER: We hope you will join us next week for another Program of ISSUES AND ANSWERS.

Paul A. Volcker (1981, August 29). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19810830_volcker

@misc{wtfs_speech_19810830_volcker,
  author = {Paul A. Volcker},
  title = {Speech},
  year = {1981},
  month = {Aug},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19810830_volcker},
  note = {Retrieved via When the Fed Speaks corpus}
}