Wednesday, July 8, 2009

This recession compared to 1930's

This is a great passage, which is really interesting in contrast with the government's current approach to virtually the exact same problem:
Hoover again rose to the occasion, trying to arrive at some solution. Lending more money would not solve the problem. The vast, intricate entanglement of the foreign debt situation was a time bomb waiting to explode at any moment. Hoover’s proposal was to call a complete "standstill" among all banks everywhere, preventing anyone from calling upon German or Central European short-term obligations.

France still pressured for a $500 million loan to Germany. Hoover refused to go along with it. Mellon warned Hoover that if the U.S. did not go along with the plan the French intended to place all the blame on the United States, and he warned that he was playing into the hands of the French. Mellon strongly urged Hoover to accept the French proposal. Hoover lost his patience, as he put it, and informed Mellon that his "standstill" plan was being released to the press at that very moment. When the news came out, the London Conference was forced to accept Hoover’s proposal because the truth was at last coming out.

A group of New York bankers complained to the White House and warned that they would not comply with the standstill. They demanded that Hoover loan money to Germany so it could pay its debts which the bankers held. As Hoover wrote: "My nerves were perhaps overstrained when I replied that, if they (bankers) did not accept within twenty-four hours (his standstill proposal), I would expose their banking conduct to the American people." Needless to say, the bankers realized Hoover’s determination and his opinion that the taxpayer should not pay for the banker’s problems, which had been created by their eager solicitation of private citizens for foreign securities, and the bankers reluctantly backed off. Indeed, the actions of the banks and the Federal Reserve had bordered on the verge of treason as they acted as willing participants in what proved to be a game of musical chairs with the unsound foreign governmental debt instruments.

-- 1931, "The Greatest Bull Market In History", Martin Armstrong

Basically, the banks wanted the government to give money to Germany, so that it could pay off debts to the banks, and the Fed was complicit with the demand, if not leading the charge. Hoover refused, knowing this was essentially rewarding the bankers for their huge Ponzi scheme with an enormous taxpayer bailout. Instead, the government decided to instigate a delay in the inevitable unwinding of leveraged investments, helping create the Depression.

Fast forward almost 80 years, and we find virtually the same situation; replace Germany with AIG and adjust the monetary numbers up to account for the currency devaluation since we abandoned the gold standard, if that helps clarify the analogy. Except in the current situation, the government decided to give the taxpayer money to the bankers, with the cooperation of (and on the strikingly similar advice of) the Federal Reserve. On the other hand, though, they took Hoover's approach to the huge house of cards in the mortgage and real estate backed securities market: essentially hampering the market's ability to correct itself, and prolonging the unwinding period. So in essence, we're once again creating a prolonged drawn-out recession, except in this case, the government didn't have the integrity to not bow to the bailout demands of the banking industry which created the economic disaster, and is instead capitalizing on the collapse to effectively nationalize several huge US industries, including banking, automobiles, health care, and energy.

Never let a good crisis go to waste, indeed; quite an interesting parallel, both in what we duplicated, and where Obama diverged from Hoover's response.

1 comment:

  1. Nick,

    You are so right on! A point I've wanted to make, but just never came up with a post is this. Back when the house of cards were falling, these large banks probably had the earnings to sustain the massive losses that they deserved to lose for their mortgage investments.

    When I worked in the mortgage industry, I can attest that the mindset was to attain as many mortgages as possible. No consideration to risk on the porfolios of loans they were purchasing.

    When the bottom feel out, instead of risking their precious earnings they went to the real crooks...aka...the government to get a bailout, to protect their bad investments. What they didn't bargain on was a President that was going to use the favor like a mob boss.

    Wish we had a Hoover in office back in 2008 instead of Bush.