The MacNeil/Lehrer Report; 5211; Paul Volcker Interview

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ROBERT MacNEIL: Tonight, Paul Volcker, Chairman of the Federal Reserve Board, a key official in guiding the economy, talks about how bad the coming economic storms will be and how we will weather them.

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MacNEIL: Good evening. Now that various government officials have confirmed that the 1980 recession has begun, everyone wants to know how bad it will be. The president says it will be mild. Private economists say, more severe. But so far, the slower economic activity has shown no sign of slowing the rate of inflation. The monthly index of consumer prices is due out tomorrow, and is expected to show inflation continuing at a record level. Since the government has slammed on the economic brakes to fight inflation, will that make the recession deeper? Conversely, will the government soon accelerate again to fight the recession? Those are the questions we put tonight to the man in charge of controlling national monetary policy and the current credit squeeze, Paul Volcker. Jim?

JIM LEHRER: Robin, there are those who claim Paul Volcker is the real father of this recession. In October, soon after he became Federal Reserve chairman, the Fed intensified its efforts to stop inflation. Its basic strategy was to cut back the amount of money that would be available for borrowing. The specific actions included raising the discount rate, the interest rate the Fed charges member banks for loans; and imposing various rules that would require banks to keep more money in reserve and thus unavailable for loans. Measured by the so-called prime rate, the interest rate a bank charges its largest customers, the results have been dramatic. That rate stood at 13 1/2 percent in October when Volcker and company announced its first actions. It was at 18 1/2 percent in March, when selective controls on consumer credit were announced. It then shot up to 20 percent before it began edging downward last week to 19 1/2 percent. The question is whether that rate will continue to go down, and if it does, is that good news or bad news? Mr. Volcker, welcome. First, are you willing to accept parenthood for this recession?

PAUL VOLCKER: No, I`ll claim no paternity. I don`t even like the question being asked that way. You know, if it has a father, any single father, and it never does, I suspect inflation and the distortions that arise from inflation are the father.

LEHRER: Would you agree with those who say the recession is here?

VOLCKER: Well, I certainly think the economy shows every sign of having declined probably for two months now, and declined appreciably. You know, we`ll have to wait a couple of quarters before we know whether it`s really a recession, but I think it`s a good chance.

LEHRER: Good chance of it. To my question that I asked there about the discount rate, do you believe that the discount rate and the other interest rates are now on their way down?

VOLCKER: Well, what you would expect, I think, Mr. Lehrer--Let`s assume that the economy is softening, that we are in a recession. We`re going to continue to provide money, provide credit, room for credit to grow, in restrained amounts. But you would normally expect a demand for credit to subside in a recession. I think we`ve seen some tentative signs, anyway, of a subsiding now, and interest rates have -- about to say--begun to go down. I like to leave forecasts of interest rates to the people paid for forecasting interest rates. But that would be a normal thing to happen in a recessionary period.

LEHRER: It`s normal. Is it a good thing?

VOLCKER: It`s a good thing, it`s obviously a good thing, if at the same time we`re making progress on the inflation front, which of course is, in a sense, what the game`s all about. Now, we`re going to be looking at some price indices. Robin mentioned that the consumer price index is coming out tomorrow. I don`t know what that`s going to show. But I know that that index has some things in it that are going to keep it high in the next few months. We`ve got to absorb the oil import fee, and the effect of that on prices. The interest rates working their way, particularly the home mortgage rates, affect that index, that particular index, not other indices, but that index in an exaggerated way. So I think that particular index, which I do not think is a very good measure of inflation actually at the moment, will remain high for a few months. But as we get into the latter part of the year, I would certainly expect to see that come down, come down appreciably.

LEHRER: Robin?

MacNEIL: Yes. Mr. Chairman, the president says mild recession. G. William Miller, the treasury secretary, says a modest recession. Are you from your somewhat more independent position as hopeful as they?

VOLCKER: Well, I think there are a lot of reasons why you would think the recession would be mild or modest. But I don`t want to kid anybody. When you are in a recession, I think we cannot always foresee precisely what`s gonna happen, and let`s see how mild it is, but I think that`s the best indication at present.

MacNEIL: But what factors are there working on the economy that would make the recession self-limiting or self-correcting or self-healing, to use the treasury secretary`s phrase?

VOLCKER: Well, investment activity generally has certainly been well sustained rising so far, and I would expect that to be well sustained. There are some sectors of the economy, particularly Home building and automobile sales and, more particularly, automobile production, where production levels have already been depressed. And therefore, the degree they have to go further may be limited. Most importantly, perhaps, compared to some earlier periods of this sort, inventories look to be in pretty good shape, by which I mean they look relatively low compared to the level of spending. What makes recessions sharp and deep typically, is a big liquidation in inventories, and the inventory picture, as I say, looks better balanced than in most incidents of this kind in the past.

MacNEIL: Would it be too cynical to accuse administration officials of saying the recession will be mild because they know as soon as it starts to look very deep in advance, they will start to stimulate the economy out of it again?

VOLCKER: Well, I`m not gonna read their minds, certainly not so cynically. But I don`t think this is at a stage where we want to think of stimulating actions that could do some long-range damage in fact. Let`s not forget that while people are concerned about a recession right now, and that`s understandable, we have had, and still do have, a problem of inflation, and as I suggested earlier, if we fail to deal with that inflation in a constructive way, I think we can look forward to a lot more economic instability. The better job we do on inflation, the better this economy will behave over a period of time. I don`t think there`s any doubt about that.

MacNEIL: Thank you. Jim?

LEHRER: Mr. Chairman, you took offense earlier--my thing about the fatherhood on the recession, but let me ask you, do you feel that the strategy that you laid out in October to control the money supply is, in fact, working? The way you wanted it to?

VOLCKER: It`s working in the immediate sense. Let me be a little bit technical for the moment if I can be. We set out to restrain the supply of money and credit; and, looked at broadly, what has happened in the last six months -- I mean, look at the numbers, where we can identify, are we on track or we`re not on track. We`re more perfectly on track, maybe partly by luck, than one could have imagined. Now, if you look at the economy and you say are things going in a beautiful way, obviously they`re not going in such a beautiful way. We`ve had more inflation than I would have expected at that time. What have we had? We`ve had a massive oil price increase, which was underestimated when we spoke earlier, the time we took those actions in October, which have been the most important factor pushing the price index up. There are a lot of other things responsible for inflation, but looking at the difference between now and then, that`s clearly been the most important factor. We`ve had concern about the international situation generally, a certain amount of unsettlement. Concern about the budget, concern about defense spending. All of which fed inflationary expectations for a while, and fed a lot of consumer spending, if you go back to December and January. So we`ve had a more intense inflationary result during this period than I would have anticipated at that time. And that`s not good.

LEHRER: I read somewhere today that somebody said, Hey, wait a minute, Volcker was right, the monetary supply is-- I mean, the strategy is working, so why in the world did he put in the consumer credit restraints in March? Why did you?

VOLCKER: Well, there was a lot of rather violent, shall I say, concern about inflation at that time, and the credit markets were getting extremely tight, as you know. And the decision to invoke the Credit Control Act, which made the direct control on consumer credit, was not mine, that`s the president`s decision. But I think he thought and in his clear rationale for this, that of all the types of credit, all the types of credit demand in the economy at that point in time, and indeed now, perhaps certain types of consumer credit, it`s not all consumer credit, certain types of consumer credit, had the least priority, and that perhaps it sent some kind of a signal to the American people that this was a problem of concern. Part of the problem was great level of borrowing on the part of consumers. And that signaling that concern in a more direct way was useful.

LEHRER: What do you think is going to happen-- I know you don`t want to prognosticate, but I`m going to ask you to do it anyhow-- The thing that is of most concern to a lot of people right now are home mortgage rates, home mortgage interest rates. What do you expect them to do in the next few months?

VOLCKER: Well, home mortgage rates will of course over a period of time reflect other interest rates in the economy. They are more sluggish, typically, than other interest rates. We`ve had quite a decline, actually, in the last couple of weeks, in long-term rates. We had a sudden rise in late January, February; that rise is pretty much retraced itself in more sensitive long-term rates like U.S. government bonds, even corporate bonds. The mortgage rate has not yet reflected that. The mortgage rate reflects in part the availability of funds to thrift institutions -- to savings and loans, savings banks. They are still pressed for getting money. And it`s going to take a little while I think for the mortgage rate to retreat downwards.

LEHRER: May 1 ask you a simplistic question? The way to fight inflation, your whole strategy, was based on the premise of raising the interest rates, or at least allowing them--

VOLCKER: Allowing.

LEHRER: --allowing them to do whatever it is that they needed to do so that-- because money was going to be more scarce. Now if the interest rates start going down now, isn`t that going to fuel inflation rather than fight it?

VOLCKER: No, I don`t think so. You`re quite right in saying we allowed interest rates to go up. Indeed, I don`t think we had any alternative. But our strategy is to restrain the supply of credit to some level that we think is consistent over time with moving down the inflation rate and getting rid of inflation. Now you had a tremendous burst and demand for credit in January and February. We were restraining the supply. What happens when you get a burst of demand, we`re restraining the supply? Interest rates went up. And indeed, we permitted them to go up. Now, if the credit demands subside, and we just see the very early indications of that now, and I don`t know what would happen if I`m here next month, or the following month. But we see some indications of it now, and you`re seeing the natural reflection of that in the interest rates going down.

LEHRER: And that doesn`t concern you?

VOLCKER: That doesn`t concern me in that context, because we`re sticking with the job of maintaining restraint on the overall supply.

LEHRER: Robin?

MacNEIL: Mr. Volcker, you said a moment ago that suddenly there was a violent concern about inflation. Are you yourself worried that a violent concern about recession politically may push aside or replace that violent concern for that inflation?

VOLCKER: Yeah, I don`t think it will, but I suppose we could be concerned about both at the same time. This has been a confusing, difficult period, I suppose for everyone. And I would suggest that what we can do in the Federal Reserve, what the government can do generally, is maintain a steadiness of purpose. And we have to continue to recognize that ultimately inflation has been, and I think continues to be, the number one problem. And that does not mean that in the natural consequence of our policy, as we were just discussing, that if indeed the downturn that we`ve had develops into a recession, that interest rates would not decline. I don`t think that should be mistaken as a change in the basic thrust of our policy, which is achieving again the credit and monetary growth that`s consistent with growth in the economy over time, but also reduced inflation.

MacNEIL: Are you worried that political concern about the recession biting too deeply will cause the government, including the Fed, to change its inflation-fighting policies too soon before they bite?

VOLCKER: I don`t see signs of that, and I don`t think that`s gonna happen.

MacNEIL: How do you know when your credit policies have gone far enough? What sign are you looking for that what you want has bitten and is achieving its purpose?

VOLCKER: Well, ultimately, the proof of the pudding is in the eating, I suppose. That we will see the inflation rate go down. As suggested earlier, I think we`ll see that before the end of the year. But if you expect to see clear signs of results next month or the following month, and if you think you can schedule it that way, you can.

MacNEIL: But if the most hopeful predictions from the administration about inflation going down do point to the end of the year, does that mean that tight money policies would continue until then?

VOLCKER: Well, what do you mean by tight money policies? As I suggested, if business is really weak, consistent with the basic framework of our policies, you would expect to see interest rates go down. And they will stay down if inflation goes down and remains under control. They won`t stay down without inflation going down.

MacNEIL: But, apart from interest rates, what about restrictions on consumer credit and so on?

VOLCKER: Well, the particular actions that we took with respect to consumer credit, the actions that we took on March 14th and when the president gave us certain authorities under the Credit Control Act, those are extraordinary actions; I`d like to get rid of those as soon as we can. I`m sure everybody else on the Federal Reserve Board would like to get rid of them as soon as we can. And when consumer credit clearly appears to be under control, when other elements of credit have a little track record of being under control, that kind of extraordinary action we ought to get rid of.

MacNEIL: What`s a measurement of being under control?

VOLCKER: Well, let`s look at it for a little period of time and see how the trend goes. MacNEIL: Thank you. Jim?

LEHRER: How long do you personally believe-- you think it`s gonna take to squeeze the inflation out of this economy?

VOLCKER: Well, you talk about completely out?

LEHRER: Completely out.

VOLCKER: Well, I could see a sharply lower inflation rate -- certainly than these 18 percent rates that we`ve been seeing in the last couple of months -- it should be sharply lower than that during the course of this year. In fact, if you take energy and home housing costs in the widest sense out of the Consumer Price Index, you`ve got an inflation rate of less than 10 percent now. Now, I`m not saying you can take those other things out -- they`re part of the prices people have to pay. But, there are indications that housing costs, and indeed oil costs, should level off. I can`t promise you that; I don`t know what OPEC is going to do, but there is a little surplus of oil in the world now, so we got a chance that that will level off. So, coming down to the 10 percent area I don`t think is all that difficult. The real question, then, is how you get from 10 percent down to zero, and that`s gonna take some time. I think we`ve made

LEHRER: A matter of years?

VOLCKER: A matter of some years, sure, to get down to zero, where you`d like to be. I think we made--tended to make mistakes in the past, not at the end of an expansion, at the end of a boom, not so much in a recession, but too much stimulus during an expansion period, during the early part of an expansion period when things tend to get out of control before you realize it. I hope we don`t make that mistake again. Now, when you talk about the rapidity of inflation coming down, there`s a terribly important structural factor I suppose you would call it that`s gonna bear upon this issue. Is productivity going to be increasing enough? We have had a dismal record on productivity in the last decade here, and at its climax last year you had an economy that grew a bit--not very much, but it grew last year -- productivity, output per man hour, per woman, per person hour, declined by two percent or more last year. Now, if productivity`s gonna decline, that means you`ve got less pie to divide up. And people want their standard of living, they want their real income to increase. They tend to ask for higher wages to get it. And if the pie is actually decreasing in size, which is what happens per capita when productivity declines, per worker, you have a much more difficult job in dealing with inflation. But let me put the optimistic cast on it. Suppose productivity begins rising again. People find their real incomes rising, as they have not found in recent years. Then, they are satisfied. They see a higher return, so to speak. They should be satisfied with lower wage increases. They will find that prices are rising less rapidly than their wages. You will see, I think, then wages decelerating, and we can get back to that period of stability. But it`s gonna take some time.

LEHRER: You mentioned housing. Are you in favor of the steps that the president has already announced to try to help the housing industry through this coming recession?

VOLCKER: Well, you know, a period like this, and particularly a period of credit restraint and reduced credit availability has a lot of rough edges to it. And the industry that gets hit first and in the strongest kind of way is housing. Now, if actions can be taken to moderate that specific impact on housing without undercutting the whole budget, and without undercutting the whole anti-inflationary program, I think that`s fine.

LEHRER: But can it be done? Once you make an exception here, aren`t you then tempted to make another exception there?

VOLCKER: Well, I think it can be done in a limited way. There are problems of the kind that you suggest. Now, some people come in -- they come in every day and want a big program to help one sector of the economy or another. You know, an awful lot of sectors of the economy are hurting now. And they`d like to crank up a huge budgetary program to take of it. Well, you crank up a huge budgetary program to take care it, we`re gonna end up not dealing with inflation. That`s--

LEHRER: Well, they`re already predicting that many businesses, small as well as large, may go bankrupt in these next few months. Should something be done about that, or is that a price you have to pay?

VOLCKER: Well, I-- you can`t deal with these problems across the board with special programs. These kinds of problems, particularly bankruptcy problems, are typically a symptom, very painful, but of over extension by one business or another. And these kinds of periods are, uh, are painful -- there`s no other word for it.

LEHRER: In other words--

VOLCKER: If you bail everybody out, if you just create more credit to take care of every problem, you know what you`re gonna have, you`re gonna have more inflation, you`re gonna have more people overextending themselves, and a bigger problem in the end.

LEHRER: Robin?

MacNEIL: Mr. Chairman, one of the reasons, I understood, for the actions last October was to do---your, the Fed`s actions -- was to defend the dollar. And since interest rates have gone up in this country the dollar has been much healthier. People have been wanting to buy dollars and lodge their surplus funds here to attract that kind of interest. If the rates start going down, is that going to have a negative effect on the dollar?

VOLCKER: Well, if the dollar`s been a lot stronger recently, as you indicate, and there`s been some retreat in the level of the dollar in the past, oh, two weeks maybe as interest rates have come down. I think that`s mostly a psychological reaction. People were evaluating, in a sense, what the next step would be. But there are several reasons why I don`t think that should happen in any serious way. And it comes back, in the end, to a matter of confidence, a matter of expectations as to whether we`re gonna deal with inflation. But, if people are convinced, people at home and abroad are convinced that we are on the basic track toward dealing with inflation, I think that in the end is the main concern in the exchange markets. However, interest rates are still quite high relative to those abroad. They would be quite high even if they came down some in coming weeks. But, I would expect -- and I would certainly hope -- that people will put the decline in interest rates, should it develop further, into some perspective and look at what the outlook for inflation is, look at what the outlook is for our own policy in terms of maintaining restraint on credit, in terms of maintaining restraint on money. We`re willing to be judged by those criteria, and I think you`ll find that we will carry out our intentions on that score. Now, one other thing I might mention in that connection: There is a huge surplus, as you know, in the OPEC countries, from the increased price in oil. Everybody else in the world virtually has a deficit in their balance of payments It`s the mirror image of the OPEC surplus. We have a deficit at the moment. We were about in balance last year, but with the new oil price increase we`ve had a deficit, or will have a deficit certainly in the first quarter, and in the second quarter I expect to see that deficit decline. And our deficit will probably be rather small in proportion to that of our trading partners. The slower that growth is here, of course, the more our exports are likely to be, and the less our imports are likely to be, so our balance of payments, not so much in an absolute sense, but in a relative sense, should look pretty good.

MacNEIL: Which tends to strengthen the dollar?

VOLCKER: Which tends to strengthen the dollar.

MacNEIL: Just one more question on that. Does that mean that fighting to defend the dollar isn`t quite as urgent a priority as it was last October?

VOLCKER: Well, you know, the way you defend the dollar-- and what we were doing last October-- is to defend the dollar at home. That is by all odds the only ultimate defense of the dollar abroad. And in that sense, our policies have not changed one iota.

MacNEIL: Well, thank you. Jim?

LEHRER: Finally, Mr. Volcker, in addition to, of course, being chairman of the Federal Reserve, you also are one of the three government members of the Chrysler loan guarantee board, and there`s been, as you know, all this talk now that Chrysler still may not make it. Is that correct?

VOLCKER: Well, I`ll tell you what stage it`s in. Chrysler has come in within the last few days with their final operating plans, financing plans for review of the guarantee board. The outside experts are looking at it, our staff is looking at it, and I think we`ll be coming to a decision pretty quickly, and that`s about all I can say.

LEHRER: What kind of decision would it be? I don`t mean what the decision would be; what will you be deciding?

VOLCKER: Well, we have-- The act that we have to administer involves something like 23 or 24 decisions we have to make as to whether certain criteria have been met. The two broadest criteria -- the real gut issues -- are, do their plans assure adequate financing for Chrylser over the period, and assure that the guarantees can be repaid, with what degree of assurance do they guarantee that; and do we leave Chrysler as an operating company, a viable operating company in 1983. Those are-- obviously you don`t get perfectly clean, cut, black and white answers to these things; you make a judgment. And we`ll make a judgment on the basis of all the evidence before us.

LEHRER: Thank you. Robin?

MacNEIL: Yes. Mr. Chairman, thank you very much for joining us this evening. Good night, Jim. LEHRER: Good night, Robin. MacNEIL: That`s all tonight. We`ll be back tomorrow night. I`m Robert MacNeil. Good night.