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Reagan and Volcker and Us



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My predecessor at the Federal Reserve, Paul Volcker, embarked in the fall of 1979 on an aggressive monetary tightening that attempted to arrest a dangerously accumulating set of inflationary forces. Presidential candidate Reagan also perceived inflation as a danger, and, then as President, afforded Volcker the political support that is so essential to a central bank when its pursuit of long-term stability risks some worsening in near-term economic activity. That support began the process that has led today to the virtual elimination of inflation from the U.S. economy.
 –   Alan Greenspan, April, 2003    Volcker’s tight-money policy added to short-term havoc in the economy.  Unemployment rose to over 10 percent.  The prime was driven to over 21 percent.  The S&L industry was on its back.  Bank closures were actually more numerous than in the Depression.  In fact, many believe the recession, which lasted for 18 months, was the worst since the Depression.  Reagan’s popularity plummeted.  The 1982 mid-term election, Republicans lost around two dozen House seats, although they held on in the Senate.  They were tough times for the nation and the Reagan administration.      So, Rich is correct when he writes this. But the key is to do the right thing, even if it is difficult in the short-term.  Doing the wrong thing, doing it quickly, and doing it in a big way, is a potential disaster.  John Hood’s excellent post has it right.    Oh, and by the way, Volcker and Reagan succeeded in reversing what Jimmy Carter had caused.  The rest is history.


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