FT: A towering disciplinarian

The frugal former Fed chief blames the current crisis on lack of restraint, says Chrystia Freeland.

This article appeared in the April 12-13, 2008 weekend edition of the Financial Times on page 7.

In an age when Manhattan financiers own helicopters to escape the traffic on their weekend treks to the Hamptons, Paul Volcker embodies the customs of another time. The 80-year old former chairman of the US Federal Reserve astonishes his hosts at New York dinner parties by asking where the nearest subway stop is; and, according to William Neikirk, one of his biographers, when he was running the world's most important central bank Mr Volcker ferried his dirty washing from his modest Washington crash pad to his daughter's home in Virginia to save on laundry costs.

But "Tall Paul", as the shy, cigar-chomping 6ft 7in banker was nicknamed by reporters, represents bygone days in more than the penny-pinching habits of a Depression-era child. Henry Kaufman, legendary Wall Street economist, describes his friend of 50 years as "a classical person. I'm not saying that he studies philosophy, but he has deep feelings about responsibilities". Another friend, hedge fund manager and philanthropist George Soros, calls him "the exemplary public servant - he embodies that old idea of civic virtue".

This reputation, and Mr Volcker's defining achievement as the banker who slayed the double-digit inflation of hte late 1970s, lent a special weight to the speech he delivered this week about the country's economic crisis. "The bright new financial system - for all its talented participants, for all its rich rewards - has failed the test of the marketplace," he told the Economic Club of New York. Despite all the noise of the volatile markets, the world listened.

"He is a towering figure," says Roger Altman, the boutique investment banker who served in the Carter administration when Mr Volcker was at the Fed. "Almost no one can speak with the authority with which he does. That authority comes from his own remarkably successful tenure at the Fed and his own integrity and his reputation for straight talk."

It is the fate of central bankers, even those who left the job more than two decades ago, to have their words parsed for hidden meanings. Some analysts saw his remarks as an attack on Ben Bernanke, the Fed's current chairman. Others contrasted Mr Volcker's critique of the new financial paradigm with the latest comments of his successor, Alan Greenspan, in defence of his own laisser-fair tenure.

Mr Volcker - reputedly not a natural politician - told a person he is close to that these perceived internecine quarrels are a mis-representation of his views. Like a good central banker, he plans to resume a gnomic silence and allow his comments to "sit out there and settle" until their meaning becomes more apparent. Some of what he said, however, is pretty clear already.

He had harsh words for private sector bankers, whose compensation practices were "most invidious of all" in the loosening of the nation's financial discipline: "the mantra of aligning incentives seems to be lost in the failure to impose symmetrical losses - or frequently any loss at all - when failures ensue". He cautioned that "it is the United States as a whole that became addicted to spending and consuming beyond its capacity to produce". Foreign money and homegrown "financial legerdemain" disguised the problem for awhile, but the man who administered the most bitter monetary medicine the country has swallowed since the second world war warned that it is again time for "painful but necessary adjustments."

Perhaps most pointedly, Mr Volcker asked why government-sponsored lenders such as Fannie Mae and Freddie Mac were not doing more to restore confidence in the mortgage market. And he reminded his listeners that the Fed's main job is not to "take many billions of uncertain assets on to its balance sheets", but rather, as "custodian of the nation's money", to "protect its value and resist chronic pressures towards inflation".

For Mr Volcker, delivering bad news is practically a professional calling. Bob Karesh, who was a graduate student at Harvard with Mr Volcker, recalls a 1979 diner they shared after a meeting between Mr Volcker and President Jimmy Carter. The conversation had been a job interview of sorts and Mr Volcker told his old classmate he feared he had flunked it by warning that "the next Fed chairman might really have to tighten up".

Mr Carter appointed him anyway. But while Mr Volcker survived the public's fury at his punishing interest rates and the subsequent recession, the presient did not. Ronald Reagan, elected in part thanks to that dismal economic mood, appointed Mr Volcker to a second term, but then replaced him with the more expansionist Alan Greenspan.

Mr Volcker, who had divided his earlier career between government and the private sector, went back to Wall Street. Even someone as frugal as he was, he told friends, needed to make a little money. Yet before long, he was back to his true love - public service - doing everything from chairing an effort to develop international accounting standards to investigating the UN's troubled Oil for Food programme to helping police the World Bank.

"He has tackled one difficult subject after another," says Gerald Corrigan, former head of the New York Fed.

Mr Volcker's oldest confreres trace his civic commitment to his father, the city manager for their town of Teaneck, New Jersey. "Paul is not an intimate person," says Mr Kaufman, but he is known for his care for his family. All his friends mention his devotion to his late wife Barbara, who suffered debilitating rheumatoid arthritis, and whom Mr Volcker was often seen wheeling along 79th Street, near their Upper East Side home, or to private dinners.

His greatest private pleasure is fly-fishing - Mr Karesh says a whole room in his apartment given over to paraphernalia. Mr Kaufman says his old friend finally decided to initiate him into the sport about 10 years ago. The pair spent two days in the waters of the Beaverkill, New York, yielding just one small fish, which Mr Kaufman landed in the first hour. Yet Mr Kaufman recalls the experience with relish: "It was amazing how patient he was in teaching me."

Pete Peterson, the private equity billionaire, describes his long-time friend as a "lovable curmudgeon". He says Mr Volcker enjoys the fact that his colleagues "are never sure where he is going to come out" on an issue - as with his recent endorsement of Barack Obama's campaign for president. Mr Soros sums up his fellow "old fogey" thus: "He has no great ambition to wealth - he gets a lot of satisfaction from the respect he has earned."