NEWSMAKER-Volcker brings experience with economic malaise

By David Lawder

WASHINGTON, Nov 26 (Reuters) - Paul Volcker, the towering former Federal Reserve chairman who tamed U.S. inflation a generation ago, brings experience with rocky economic times and tough choices to his new role as a key financial adviser to President-elect Barack Obama.

The 81-year-old Volcker, who ran the U.S. central bank from 1979 to 1987, will face a maelstrom of financial turmoil, government bailouts and a deepening recession at an age when even his successor, Alan Greenspan, is enjoying retirement.

Volcker, who has remained active in public service, gained Obama's confidence during the election campaign as the credit crisis deepened, advising the Illinois senator to back the U.S. Treasury's request for a $700 billion financial rescue fund.

As chair of a special White House advisory panel, Volcker will provide advice on steering the United States out of recession and stabilizing financial markets.

In that role, he will act as a counterbalance to Obama policy heavyweights Lawrence Summers, who will head the National Economic Council, and Timothy Geithner, who has been nominated to be the next Treasury secretary.

Volcker commands respect from Democrats and Republicans alike for his decisiveness in ending a devastating inflationary spiral in the late 1970s. He did so by hiking interest rates to unprecedented levels, launching a recession in 1981-82 that was the worst since the Great Depression of the 1930s.

Many think the economy now faces a recession just as deep.

That effort more than a quarter century ago has been credited by many, including Volcker, for setting the stage for steady growth and a long bull market that brought prosperity to millions of Americans. Initially appointed by President Jimmy Carter to head the U.S. central bank, he was reappointed by Republican President Ronald Reagan.

"Without Paul Volcker's toughness and guts, we may never have broken the grip of rising inflation and declining productivity that plagued the United States during the 1970s," former Securities and Exchange Commission Chairman Arthur Levitt wrote in the foreword of Joseph Treaster's 2004 biography "Paul Volcker: The Making of a Financial Legend."

Volcker, however, later conceded that he had made a mistake by ordering such a major squeeze on credit, telling Reuters in 1987 that if he could, "I would have played it different."

SUPPORTIVE OF FED RESCUE EFFORTS

Now, he will wrestle with how to restore credit flows, rather than how to stop them.

Volcker has supported current Fed Chairman Ben Bernanke's approach to the credit crisis. Bernanke has moved aggressively to pump funds into the banking system and avoid massive financial institution failures.

Last month, Volcker said the United States was already in a recession that could be "rather long."

He said the new administration needed to rebuild trust and confidence in government financial policies, and said the economy needed more investment and infrastructure development.

"It's going to be a tough period," he said. "But when we dealt with inflation (in the early 1980s) it laid the groundwork for 20 years of growth."

"I'd like to see that happen this time," he said.

GRAFT INVESTIGATOR

Volcker has maintained a reputation for integrity and independence that has landed him several post-Fed roles leading investigative panels on a wide range of financial and humanitarian issues.

Among these were a probe of the United Nations oil-for-food program, which diverted funds to Saddam Hussein's government in Iraq. He also led a panel to resolve questions over unclaimed Swiss bank accounts of Holocaust victims.

In 2002, he was tapped to look into the role now-defunct accounting firm Arthur Anderson played in the collapse of Enron Corp. Some of his recommendations were later incorporated into corporate reform legislation.

Six feet, 8 inches tall (2.03 metres) with a rumbling baritone voice, Volcker cuts a larger-than-life figure and was the first to bring celebrity status to the job of U.S. central banker.

While in charge of the Fed he could soothe or excite financial markets with a vague murmur and a wave of his trademark cigar. Under doctor's orders, he quit smoking after he left the Fed.

Volcker also has shunned the traditional trappings of status and power. He favors old suits and during his Fed heyday lived in a cluttered Washington apartment near the Fed, commuting to New York on weekends in an old Ford.