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  • 00:00:05,135 --> 00:00:07,125 Today we're going to talk about Paul Volcker.

  • Now, he passed away this week but we're

  • going to discuss his legacy and what's relevant to today.

  • 00:00:15,670 --> 00:00:18,610 Mr Volcker was president of the US Federal Reserve

  • back in the '70s and '80s.

  • And at the time, inflation was crazy high.

  • This red line is the 12-month percentage change in inflation.

  • So what that means is in this year, inflation was almost 14

  • per cent higher than it had been the year before.

  • And that means that prices were going up really, really,

  • really quickly.

  • And that's part of the reason that President Jimmy Carter

  • actually appointed Paul Volcker to be the president of the US

  • Federal Reserve.

  • And what he did was to raise interest rates really,

  • really high in order to bring down inflation,

  • because remember, when interest rates are higher,

  • it's more expensive to borrow money.

  • But what that did is that it pushed the US into a recession.

  • So this blue line here is the GDP.

  • Now, as you can imagine, folks were really mad

  • at Paul Volcker.

  • Interest rates were almost as high

  • as 20 per cent, which meant that things like housing

  • construction stopped.

  • People didn't want to buy cars.

  • People lost their jobs.

  • And the GDP sunk below zero.

  • People were really upset, including lawmakers and just

  • American citizens in general.

  • But Mr Volcker didn't relent.

  • He stood by his decision to keep interest rates high

  • because he knew it was important to bring inflation down.

  • And he was justified because that's exactly what happened,

  • as you can see here.

  • And one of the things that Mr Volcker is credited with

  • is that if you look over the course of this chart,

  • inflation has never been as high as it was during that period.

  • And so he gets a lot of credit for sticking

  • by that difficult decision, even though people were really upset

  • with him.

  • The reason that that is so important

  • is because he restored credibility to the Fed.

  • Now when financial institutions don't believe that the rules

  • enforcers are going to actually enforce the rules,

  • then they have no incentive not to act

  • in a risky way, which is what happened in 2008

  • during the financial crisis.

  • And you can see the GDP sink here during that time period.

  • Another one of Paul Volcker's legacies

  • was the Volcker Rule, which came into effect after the 2008

  • crisis as part of the Dodd-Frank Act, which ended

  • proprietary trading for banks.

  • And today, inflation, as you can see, is not as high as it was.

  • We're really not facing the same problems

  • that he faced when he was the Fed president back in the '70s

  • and '80s.

  • But, in fact, it's the opposite problem,

  • which is that the Fed would like it

  • if inflation was just a little bit higher, since its target is

  • 2 per cent.

  • All in all, I think that the most important lesson

  • from this time period is that it's important for regulators

  • to have courage to do what is necessary,

  • even if that means being unpopular for a little while.

00:00:05,135 --> 00:00:07,125 Today we're going to talk about Paul Volcker.

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