The 1980s Hero Who Saved the U.S. Economy From the 1970s

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October may not be the cruelest month for investors -- based on the averages, that's September. But when Wall Street stumbles at this point of the year, it stumbles extra hard. And that's why Alison Southwick and Robert Brokamp picked October for a four-part series on the history of market crashes in the United States.

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In this podcast, guest and Former Fool Morgan Housel leads the discussion as they reflect on two major economic tumbles: the long downturn of the 1970s and 1987's Black Monday. The 1970s in particular became a steaming pile of financial awful as the country was hit by a confluence of troubles. But the standout economic issue was double-digit inflation. To break the cycle, Fed Chairman Paul Volcker (who much later would have a "rule" named after him) took actions that at the time that might have seemed as painful as the conditions they were intended to solve.

A full transcript follows the video.

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This video was recorded on Oct. 10, 2017.

Alison Southwick: So it was kind of a slow-burning economic mess. How did we come out of it?

Morgan Housel: I think there are a few times when talking about these events where you can point to one person and say that person pulled it out -- I think in this event you can point to Paul Volcker, who was the Fed chairman in the early 1980s.

Southwick: A maker of rules.

Housel: Right.

Southwick: I've heard of his rules.

Housel: That's right. He kind of came back in the last couple of years with the Volcker Rule. But he did something in the early '80s that I think very few people in the history of the Fed would do, which, he was fearless about jacking up interest rates as high as they needed to go and brought interest rates up to close to 20%, which made this economic recession and pain that much worse. A lot of businesses went out of business that had to refinance their debt, but now interest rates were 20%, so there was no way you could refinance it. Really caused a lot of pain in the economy, but it broke the back of inflation, which is what needed to happen.

And Paul Volcker, during the time -- it's funny, in hindsight, I think a lot of people think Volcker is a hero. I think he's almost universally seen as a hero today. In the '80s he was probably the least popular person in America, so much so that I think he was the first Fed chairman that had Secret Service detail because people at the Fed built an effigy of him and burned it on the steps of the Fed.

Southwick: His own employees did that?

Housel: Not his own employees, but somebody. But he was truly one of the least popular people in America at the time, because it was viewed -- and I think rightly viewed -- that his actions were driving the economy into the ground. And it's true that they were, but they were also, at the same time, killing what needed to be killed. It's almost like with chemotherapy. It's going to destroy your body, and it's awful. And from the outside it's like, "God, chemotherapy is the worst thing ever." But at the same time, it's killing the worst disease. That was what Volcker was doing in the '80s.

So it took several years of doing it, but finally in the early '80s -- about '83 or '84 -- is when inflation and interest rates started falling again. And then you had the opposite effect of rising interest rates are bad for stocks. And then, all of a sudden, '83-'84, interest rates were plunging, which was great for stocks.

Robert Brokamp: And bonds.

Housel: And then it's Reagan, "Morning in America," and bonds, too. Inflation's falling. You get a new president who has a lot of optimism. Then you start, in the 1980s, a booming rally.

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