Former boss of the Fed questions Coalition's austerity plans and the end of fiscal stimulus

Deputy Business Editor, Sunday Herald

Sunday 16 September 2012

PAUL Volcker, the former chairman of the US Federal Reserve, has questioned the wisdom of the UK Coalition's austerity programme while the economy remains weak.

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By Steven Vass

Volcker, who held the most powerful economic job in the world between 1979 and 1987, is remembered as the central banker who caused the savage recession of the early 1980s by driving US interest rates above 20% in the name of combating inflation at all costs. More recently he was an adviser to President Obama.

Ahead of a trip to Scotland to address the conference of the Institute of Chartered Accountants of Scotland, he told the Sunday Herald that it made no sense for the US to completely withdraw its economic stimulus at the moment and that there was a strong case for taking the same view in the UK, too. He said: "In the US we have a big budget deficit, we have got to deal with that in the future. But in the short run in most people's opinions we can't squeeze down hard on the budget, raise taxes or reduce expenditures massively. We need to do it over a period of time. "Right now, withdrawing fiscal stimulus doesn't seem to make a lot of sense."He added: "[The UK] does not have the same problems as Spain and you are not part of the euro so you have got your own currency and your own central bank and exchequer. "On the fiscal side, you are somewhat in the same situation as the US, maybe less critically."Asked whether this meant that Chancellor George Osborne's drive to remove the UK deficit by 2017 was ill-advised, he said: "I might have some sympathy with that. The judgment you make is when and how you attack the problems which we both have to do. I would leave that to the British Government."He counselled "patience" in the battle to turn around Western economies, doubting that the recent moves towards more quantitative easing in the US and the unlimited bond-buying programme by the European Central Bank (ECB) would "dramatically change the situation".He said: "Due to a lack of discipline, we let some big bubbles arise and got over-indebted and it's a very difficult situation."He said that austerity was unavoidable in the troubled countries of southern Europe, but declined to comment on widespread concerns that the ECB's bond buying would make it harder to enforce austerity in a country like Spain several years down the line. He also declined to express an opinion on the economic wisdom of Scottish independence, saying that it is a "judgment that you Scots have to make". Volcker, who famously advised the Nixon administration to abandon the gold standard during his time as under-secretary to the Treasury, took over at the Federal Reserve with a mission to combat 1970s stagflation. He followed the arguments of monetarist economists like Milton Friedman that central bankers should use the base rate not to manage the economy but simply to control the money supply. Following massive surges in rates and mounting evidence that money supply management was not effective, the policy was gradually dropped. Volcker resigned in 1987 when he failed to receive clear support from President Reagan for a third term. Following the perceived errors of his successors, Alan Greenspan and Ben Bernanke, he is now widely regarded as one of the best US central bankers in living memory.

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Former boss of the Fed questions Coalition's austerity plans and the end of fiscal stimulus

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