From UPSC perspective, the following things are important :
Prelims level : Volcker's Rule
Mains level : Inflation control measures
Paul Volcker passed away on December 8. He was the economist who helped shape US economic policy during the period of “The Great Inflation” that lasted for roughly two decades starting in the mid-1960s.
“The Great Inflation”
- The Great Inflation of 1965-82 was one of the defining macroeconomic events in the US history.
- It was marked by the abandonment of the global monetary system used during World War II, multiple economic recessions, and wage and price controls.
- Inflation in the US rose from below 2 percent in 1962 to above 15 percent by 1979.
- Paul Volcker was appointed Chairman of the Board of Governors of the United States Federal Reserve System on August 6, 1979, and given a second term in 1983.
- The Volcker Rule generally prohibits banks from conducting certain investment activities with their own accounts and limits their dealings with hedge funds and private equity funds, also called covered funds.
- In easy terms it prohibits banks from using customer deposits for their own profit.
- They can’t own, invest in, or sponsor hedge funds, private equity funds, or other trading operations for their use.
- It aims to protect bank customers by preventing banks from making certain types of speculative investments.
- The Volcker Rule allows trading in two circumstances. First, banks can trade when it’s necessary to run their business. For example, they can engage in currency trading to offset their foreign currency holdings.
- Second, banks can trade on behalf of their customers. They can use client funds only with the client’s approval.
The idea unique
- What Volcker did differently was to emphasis a tighter control on reserves and bring in credit control policies at a time when it was generally accepted that controlling inflation required greater control over the growth rate of reserves and broad money.
- Even so, despite these measures, the US economy entered a phase of recession in 1981 and unemployment rose to about 11 percent, but inflation was coming down.
- By the end of 1982, the economy entered “a period of sustained growth and stability”.