Allan Meltzer Made a Career as the Chief Scourge of Financial Regulators

By James R. Hagerty Features Dow Jones Newswires

Allan Meltzer devoted a large share of his scholarly life to telling the Federal Reserve and other financial regulators, politely but firmly, that they were falling down on the job.

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Dr. Meltzer's two-volume history of the U.S. central bank, stretching beyond 2,100 pages, found that the Fed had rarely come up with just the right medicine for the economy. He chastised Fed officials for paying too much heed to the "daily yammering" of financial markets and too little to the long-term health of the economy.

The Carnegie Mellon University economist also was a co-founder of the Shadow Open Market Committee, a gathering of monetarists and mavericks who since 1973 have advised and second-guessed the Fed.

Through his books and articles, Dr. Meltzer became an influential opponent of what he saw as excessive regulation of banks and of bailouts for those that misbehaved. If banks were allowed to fail, he argued, shareholders and executives would learn to be more prudent. "Capitalism without failure is like religion without sin," he often said.

Dr. Meltzer died May 8 of pneumonia at a hospital in Pittsburgh. He was 89.

Little in his early life suggested he would become the gentle scourge of financial regulators.

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Allan Harold Meltzer was born Feb. 6, 1928, in Boston. His father had business interests including a Cadillac dealership, a maker of stainless steel knives and forks, and retirement communities in Florida. When he was 5, Allan's mother died. The family later moved to Westwood, Mass., where he found few other Jews and was introduced to anti-Semitism.

Partly because of that, he chose a faraway university, Duke, in North Carolina. He thought of becoming a lawyer but was enthralled by an economics course and chose that as his major. During his college years, he also crisscrossed the South as a civil-rights activist and worked for the unsuccessful 1948 presidential candidacy of Henry Wallace, a left-winger nominated by the Progressive Party.

His political views shifted after he concluded that members of the Progressive Party were more interested in pushing a pro-Russian foreign policy than in promoting ideas he supported. He evolved into a libertarian. Capitalism, he wrote in one essay, "works well with people as they are, not as someone would like to make them."

After graduating from Duke, he worked for his father's cutlery business as a traveling salesman and helped run a shoe-polish company. While working in Los Angeles, he met Marilyn Ginsburg, a social work student whose parents owned a restaurant. They were married six weeks after their first date. "Allan did not waste time," she said last week. He often credited her with allowing him to focus on his research and teaching.

At the University of California, Los Angeles, he earned master's and doctoral degrees in economics. As part of his studies, he spent a year in Paris in the mid-1950s as a Fulbright scholar and wrote a thesis on wartime inflation in France. In 1957, he joined the faculty of what is now Carnegie Mellon in Pittsburgh.

He was on the President's Economic Policy Advisory Board during the Reagan administration and served as a consultant to congressional committees, the U.S. Treasury and foreign central banks. In 1999 and 2000, he headed a congressional panel seeking to improve the performance of the World Bank and International Monetary Fund.

His astoundingly deep dive into Fed history began in 1963 when U.S. Rep. Wright Patman, a Texas Democrat, asked him to do a study of the institution. His original studies "were hastily written to meet congressional deadlines," he wrote. He kept digging and spent 14 years writing a history of the Fed. In 2003, The Wall Street Journal declared his first volume "masterly." Former Fed Chairman Alan Greenspan wrote in the preface that the history was "fascinating and valuable."

During the Depression of the 1930s, the Fed failed to prevent a steep fall in the money supply, missing a chance to alleviate the crisis, Dr. Meltzer found. Later errors by the central bank made inflation worse and contributed to the housing market collapse that helped precipitate the 2008-09 recession, he wrote.

Though he thought the Fed was usually too concerned with the short term, he said one exception was the fight led by Fed Chairman Paul Volcker against inflation in the early 1980s. Mr. Volcker "pursued a long-term strategy...knowing that it wasn't going to happen in the next quarter," Dr. Meltzer said during a panel discussion in 2010.

In an interview, Mr. Volcker described Dr. Meltzer as a gadfly and said, "He kept at it."

Dr. Meltzer loathed the proliferation of regulations. Financial firms would sneak around them, and market changes would soon render the rules obsolete, he wrote. A wiser approach, he said, would be to require higher capital ratios for larger banks. That would deter banks from growing into behemoths deemed too big to fail, Dr. Meltzer said. If bankers "make the wrong calls," he said in one interview, they and their shareholders "must be made to pay the price themselves."

He worried about U.S. budget deficits and unfunded obligations. "At the city, state and federal government, we've promised people things that we aren't going to be able to do," he said in a presentation on one of his books. "We're going to have to take away things that have been promised....We're going to have higher tax rates and we're going to have less spending."

He deplored the congressional habit of leaving details to regulatory agencies. "Much regulation has the effect of replacing the rule of law with arbitrary decisions by lawyers and bureaucrats," he wrote in a 2012 book, "Why Capitalism."

Regulators were gaining too many powers to regulate as they saw fit, undermining the rule of law, he warned. Even while in intensive care shortly before his death, Dr. Meltzer continued working on an unfinished book about regulation and the rule of law.

He is survived by his wife of 66 years, Marilyn, three children and eight grandchildren.

He liked talking about baseball and could recite statistics about the Boston Red Sox of his youth. He also worked in his garden and nurtured roses. When he was in his early 80s, his son Bruce asked him what was on his agenda. "Not very much," the professor said. "I'm writing a book." That, said Bruce Meltzer, "was my dad's idea of not doing much."

Write to James R. Hagerty at bob.hagerty@wsj.com

(END) Dow Jones Newswires

May 19, 2017 10:14 ET (14:14 GMT)