John Feehery: Speaking Engagements



Posted on September 21, 2008

The Great Depression, Part 2?


You hear a lot about the Great Depression these days.  Democrats, especially, love to talk about how George Bush is just like Herbert Hoover.  They like to focus on the high rate of home foreclosures, the high unemployment, the bank failures.


The Great Depression still burns in our nation’s soul.  My parents were born either in the middle of the Depression or just after it, and they still have that Depression mentality.  They worry about money in ways that most baby-boomers and generations x, y and z, couldn’t comprehend.


There is still no consensus about what caused the Depression.  Liberals believe that the government didn’t spend enough to prime the pump.   Conservatives believe that easy credit led to too much debt, and when banks started to fail, the Fed failed to take appropriate action to keep the financial solvent.


Federal Reserve Ben Bernanke is a student of the Great Depression.  Has fate placed him at the Fed so he can help us avoid a GD II, or has fate dealt him a cruel hand so that he can have a front seat in the making of a terrible history rerun.


We do know that several things made the stock market crash of 1929 a lot worse.  Two Senators named Smoot and Hawley put their names on a series of protectionist measures that made it almost impossible for America to export its way out of its financial problems.  Protectionism is now making a healthy come-back in the current Democratically-controlled Congress.


Once Franklin Roosevelt became President, he did one smart thing and several other less smart things that prolonged the Depression.  First, he signed legislation that ended prohibition.  (That was the smart thing).  Second, he pushed for a series of laws that rapidly increased the size and power of the government, and sharply raised taxes on all “rich” people.


My grandfather worked in CCC, so I will not criticize the whole New Deal.  But from an economics perspective, the fact is that unemployment was almost at bad in 1939 as it was in 1933. Until we started gearing up for the wars with Germany and Japan,  America’s economic output still was pretty meager throughout the 1930’s.


FDR may have made people feel better about themselves throughout that dark decade (maybe it was the booze) but his flirtation with socialism didn’t really help grow the economy.


Now, we are stuck with a new set of economic realities.  The government has pretty much taken over a big chunk of Wall Street, something it never dreamed of doing in 1933.  Many people are blaming the greed of the Wall Street traders for the fiscal crisis that we now face.  But greed has been part of Wall Street since Alexander Hamilton arrived there.


Greed is not the problem.  Corruption and incompetence are the real causes.  Government corruption, including the special roles that Government Sponsored Entities, like Fannie and Freddie, played a huge role in allowing this crisis get the best of us.  And regulatory incompetence, a failure to understand what these guys were up to in New York, London, Tokyo, and around the globe, played another important role.


Barack Obama thinks the problem is, quite simply, capitalism.  He thinks the rich need to be punished, and the poor need to be paid.  He distrusts the free market philosophy, or “the philosophy of John McCain and George Bush”, as he likes to call it.


But the free market didn’t get a chance to work here.  Many mortgage companies were forced to give sub-prime loans to people who couldn’t afford it.  And consumers (who actually deserve most of the blame and are getting none of it) were given perverse tax incentives to buy houses they couldn’t afford, and then take out loans based on those mortgages that they knew they couldn’t afford.


But that is all water under the bridge.  Now is the time for the Congress and the Executive Branch to act to make certain we don’t do a GD II.


It needs to all steps possible to unfreeze the credit markets.


It needs to provide a marketplace so the big lenders can liquidate their bad assets.


It needs to suspend stupid regulations (like the mark-to-market regs) that make companies take losses now that they may not have in the future.


It needs to stop all provisions that add even more money to our national debt that are not directly linked to the credit crisis.  This is no time for Christmas in DC.


It needs to kill dumb proposals the sharply raise taxes on investors and investment and it needs to promote international trade, not protectionism.


I am no expert, but I don’t think we are entering a reincarnation of the next Great Depression.  Hopefully the marketplace is smarter, the executive branch is smarter and the Congress is smarter.  I hold out hope for the marketplace and for the Treasury Department.  I have little hope in the Congress.



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