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Obama Gets Huge Endorsement: Paul Volcker

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First, I'm back from vacation and I will start blogging again tomorrow.

I've been silent on the Democratic primary. I'm not much of a political writer (duh!) and am not that astute at the underlying political trends/give and take of everyday politics. In addition, I'm very much a political centrist, which is not exactly where the primaries are fought.

I should also state that I was first a Dodd supporter, largely because he was easily the most experienced candidate. Since he dropped out, I've been pretty agnostic about the whole primary thing.

However, this is huge news, especially with economic wonks. In addition, the following endorsement comes from my favorite Federal Reserve Chairman.

From the WSJ:

"After 30 years in government, serving under five presidents of both parties and chairing two non-partisan commissions on the Public Service, I have been reluctant to engage in political campaigns. The time has come to overcome that reluctance," Mr. Volcker said in a statement today. "However, it is not the current turmoil in markets or the economic uncertainties that have impelled my decision. Rather, it is the breadth and depth of challenges that face our nation at home and abroad. Those challenges demand a new leadership and a fresh approach."

He concluded: "It is only Barack Obama, in his person, in his ideas, in his ability to understand and to articulate both our needs and our hopes that provide the potential for strong and fresh leadership. That leadership must begin here in America but it can also restore needed confidence in our vision, our strength, and our purposes right around the world."

That was from from Paul Volcker, former chairman of the Federal Reserve. Here's a little history. Volcker's actions in the early 1980s are the primary reason the country didn't fall into a period of rapidly escalating inflation in the early 1980s. His solution wasn't exactly popular. He jacked-up interest rates to massively high levels. Here's a chart of the effective Federal funds rate from the St. Louis Federal Reserve.

The high points are Volckers doing. His actions are a primary reason the U.S. experienced a double-dip recession in the early 1980s.

However, his actions killed inflation. Here's a chart of inflation from the St. Louis Fed.

Notice how inflation died after the interest rate hikes of the early 1980s. In other words, Volcker's actions were successful. And that's a really good thing because no one wants to live through massive inflation.

In addition, Volcker is one of the few economists who has correctly diagnosed the the central problem of the U.S. economy. On April 10, 2005, Volcker wrote an opinion piece in the Washington Post titled, An Economy on Thin Ice. Here is the central issue:

The difficulty is that this seemingly comfortable pattern can't go on indefinitely. I don't know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars.

I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change.

The point of all this is simple: Volcker has "been there and done that" in more ways then one. He is an accomplished economist with solid practical real-world experience.

This is an endorsement that carries a great deal of weight with the economic crowd.