Paul Volcker, who served as Chairman of the Board of Governors of the Federal Reserve Bank from 1979 - 1987, is one of Senator Obama's senior economic advisers.
When Mr. Volcker took office, the U.S. economy was in poor shape. The impact of two oil shocks had been greatly amplified by the flood of cheap money unleashed by Arthur F. Burns and G. William Miller who served as Chairmen from 1970 - 1978 and 1978 - 1979 respectively. The result was high inflation, high unemployment, and anemic growth.
Chairman Volcker's term of office was marked by sound money policies. In the short term these policies were very painful but inflation was controlled. Combined with tax cuts, and reforms to the tax code, during President Reagan's two administrations, sound money policies provided the foundation for a period of economic stability and prosperity that lasted until the dot.com bubble.
After Mr. Volcker, came Alan Greenspan (Bubblespan?) who, during his eighteen year service as Chairman, unleashed another flood of cheap money on the economy. Although general inflation has not yet taken off in the manner of the 1970s, the ensuing series of asset price bubbles has been a disaster. While President Bush's tax cuts likely did little harm, and may have been beneficial, out of control spending has certainly amplified the damage caused by too much, too cheap, money.
A major part of the current economic and financial crisis can be attributed to the reckless and unwise, but probably inevitable, response of investment bankers to this flood of money. A strong argument can be made that we would not be in this financial swamp without the monetary - and fiscal - profligacy of the past eight years.
To date, Senator Obama's economic and tax policies have been notable for class warfare rhetoric - reminiscent of British Labour governments in the 1960s and 1970s. If Senator Obama is willing to listen to Mr. Volcker's advice, and act on it, there is a small ray of hope that class warfare polices will be, if not abandoned, at least moderated.