Paul Samuelson: Balancing Market Freedoms

Paul Samuelson (not to be confused with columnist Robert Samuelson) says recovery may not be "just around the corner," and we need to get ready for the worst case scenario. That means imposing financial market regulation and being ready to take take action immediately if there are any further signs of trouble. [On the continuation page, there are also comments from Yves Smith on a speech on financial market regulation by Minneapolis Fed president Gary Stern, and part of a Vox EU post by Stephen Cecchetti on how to regulate financial markets without stifling innovation]:

Balancing market freedoms, by Paul A. Samuelson, Commentary, IHT: All through the years of the Great Depression, Wall Street publicists and President Herbert Hoover would repeatedly declare: "Recovery is just around the corner." They were wrong. And history repeats itself.

Today, Federal Reserve Chairman Ben Bernanke admits that nobody, including him, is able to guess how near to bankruptcy the biggest banks in New York, London, Frankfort and Tokyo might be as a result of the real estate crisis.

As one of the economists who helped create today's newfangled securities, I must plead guilty: These new mechanisms both mask transparency and tempt to rash over-leveraging. ...

The situation is not hopeless.

New, rational regulations that discourage predatory lending and rash borrowing could help a lot. Also, as we learned during the Great Depression, the government's treasury and its central bank must be both the lenders of last resort and the spenders of last resort. Speculative markets will not stabilize themselves.

The best policy is actually the middle way: not too much freedom for market forces, and definitely not too little freedom. ...

Since we live ever in the short run, global leaders must make their best guesses about what to be doing in 2008. Here are my tentative suggestions:

Watch developments closely. If America's Christmas retail sales fail badly - as they could when high energy prices and high mortgage costs pinch consumers' pocket books - then be prepared to accelerate credit infusions by central banks on the three main continents.

Keep in mind threats of excessive inflation. But be aware that the skies will not fall if the price-level indices blip up from 1.9 to 2.6 percent per annum. What worsens the public's expectations about price instability are excessive spikes in the cost of living.

Finally, to reduce the burden of mass foreclosures of over-expensive mortgages, we should explore new quasi-public agencies, as we did with the Depression-era Reconstruction Finance Corp., that specialize in supplementing for-profit ordinary lenders. This suggests expanding in a controlled way the lending powers of quasi-public agencies such as Fannie May and Freddie Mac. Better that they should lose a bit when they help homeowners of modest means fend off foreclosures on their onerous mortgages.

Maybe such innovations will turn out not to be needed. But keeping in mind worst-case scenarios of the freezing-up of banks and other lending agencies, exploratory planning is worthwhile insurance.

What the world does not need now is tolerance for any persistent weakness in global Main Street growth. It is better when physicians worry too much about a patient's health than when they worry too little.

Maybe Samuelson should have a talk with Gary Stern. Here's a shortened version of a much longer post on Stern's speech from Yves Smith:

Fed's Gary Stern Makes Lame Arguments Against Increased Credit Market Regulation, by Yves Smith: Perhaps I am attributing too much importance to a single speech, but the Minneapolis Fed President Gary Stern's "Credit Market Developments: Lessons for Central Banking," reveals a lot of what is wrong about the way policymakers are thinking about our credit crisis. And if Stern's position is widely held within the Fed, we are in worse trouble that I imagined.

I'll first deal with what I consider to be the overarching problem, namely, ideological bias, and then deal with the particulars in his speech.

The MarketWatch summary of Stern's speech gave me cause for pause:

Federal regulators should be cautious in efforts to craft a regulatory response to the disastrous subprime mortgage meltdown, Minneapolis Fed President Gary Stern said Sunday.

Stern said he was not defending the status quo but simply urging caution.

Now, on the surface, this sounds reasonable, except that the Fed has yet to advance a single proposal as to what to do in response to the subprime crisis, save its interest rate cuts and suggesting that Fannie and Freddie purchase jumbo mortgages. But these moves are merely palliative; they don't address the underlying causes. So to urge caution without serving up proposals has the effect of forestalling action. ...

Policymakers will certainly find opportunities to improve current regulations and practices; the status quo will need to change in some areas. But, as we will see, and as foreshadowed previously, tradeoffs suggest that policymakers will want to be extraordinarily careful in addressing perceived inadequacies in the current environment.

Extraordinarily careful? Perceived inadequacies? You don't need to be expert in bureaucrat-speak to recognize that this is code for "don't touch that dial."...

Finally, from Stern's conclusion:

My comments this morning are not intended to defend the regulatory and financial status quo, although I can understand that some may interpret them in that way. Rather, they are meant to suggest that there is likely little, if any, “low hanging fruit” to harvest and that, specifically, reforms may well impose inefficiencies and other costs of their own.

Baloney. Here is some low hanging fruit and readers can no doubt come up with more items:

All residential mortgage brokers will be subject to Federal reporting and oversight (presumably at least along the lines of the requirements for brokers employed by regulated banks, although those may need to be toughened too).

Requiring the prospectus for any rated security to be filed with the SEC (right now, even regulators cannot get copies of collateralized debt obligation documents unless someone is kind enough to pass it to them because they are made available only to "qualified investors" and the Fed is not a "qualified investor"!. I am not certain CDOs will survive this downturn, but if they do, they will have to go to more standardized structures, and this move would facilitate that.

Standardized disclosure of mortgage terms, particularly payments and fees. Definitions, method of calculation (and inclusion of taxes and insurance), terminology, placement in the mortgage documents (and any preliminary selling documents) will be consistent.

Finally, here is Stephen Cecchetti with recommendation on how to regulate financial markets without forestalling innovation:

Preparing for the next financial crisis, by Stephen Cecchetti, Vox EU: There is a natural tendency for financial regulators and supervisors to fight the last battle, looking for systemic weaknesses revealed by the most recent crisis. It happened after the 1987 stock market crash, during the Asian crisis, and again following the LTCM collapse. And it seems almost certain to happen again this time. So, while it is surely important to examine the specific problems involving banking system off-balance-sheet activities, the quality of collateral used to back commercial paper, and the manner in which ratings are used, I believe that we need to look further.

While market forces seem likely to cleanup much of the current mess, punishing the people who had inadequate oversight and risk controls in place, government officials who create the regulatory environment in which these problems occurred still have work to do. My proposal is that existing international committees like the Financial Stability Forum examine the design and trading of securities, especially derivate instruments, working to increase standardised and encouraging the movement of trading to organised exchanges.

In looking at the financial landscape, we can see that securities fall into three broad categories: (1) exchange traded; (2) standardised, but over-the-counter traded; and (3) customised. In the first case, the securities are standardised, transparent, and traded through a clearinghouse system. The first two properties mean make it more likely that you will know what you own and that you will know the best way to try to sell it.  The existence of the clearinghouse helps to improve the stability of the entire financial system.  Let me explain why.

A critical part of any financial arrangement is the assurance that the two parties to it meet their obligations.  In organised exchanges, there is something called a “clearinghouse” that insures that both sides of the contract will perform as promised.  Instead of making a bilateral arrangement, both the buyers and sellers of a security make a contract with the clearinghouse.   

Beyond reducing counterparty risk, the clearinghouse has other critical functions.  The most important are maintenance of margin requirements and the “marking to market” of the gains and losses.  In order to reduce the risk that it faces, the clearinghouse requires parties to contracts to maintain deposits whose size depends on the details of the contracts. And at the end of every day, the clearinghouse posts gains and losses on each contract to the parties that are involved – positions are marked to market. ...

It is important to realise that because they reduce risk in the system as a whole, clearinghouses are good for everyone. They are what economists refer to as “public goods”. But the fact that everyone obtains the benefits regardless of whether they pay the costs, means that they are difficult to set up.  Private markets will not supply public goods, so governments have to get involved. ...

How can we encourage the movement of mature securities onto exchanges?  The answer is through a combination of information and regulation.  On the information side, it is important that less-sophisticated investors realise the importance of sticking with exchange-traded products.  The treasurer who manages the short-term cash balances for a small-town government should not be willing to purchase commercial paper, or any security, that is not exchange traded.

As for regulation, over the years we reached broad agreement on which financial institutions are critical to the operation our economic system and proceeded to impose substantial restrictions on the assets that they can hold.  These come as a combination of outright prohibitions and differential treatment in capital regulation.  For example, commercial banks in the United States are not allowed to hold equity, and they are discouraged from holding corporate bonds.  It is not difficult to imagine changes in regulation and supervision that would encourage migration of a variety of bonds, commercial paper, and derivatives onto organised exchanges.

In conclusion, as we think about the right response to the current and future crisis, there are two things to keep in mind.  First, we do not want to stifle innovation.  In the same way that we all want newer and better drugs, we all want newer and better securities. Second, the innovators will always find and exploit the weakest point in the system.  So, just as drugs are tested outside the general population, we need to test financial innovations in places where they are least likely to do damage to the parts of financial system we deem critical.   But then, once we know that something is safe, it should be standardised and pushed onto an organised exchange where it will be traded through a clearinghouse.

Comments

[robertdfeinman]

Let's assume that a consensus is formed on the need for some sort economic stimulation. However it is implemented the net result seems to be that it will inject federal funds into the system.

Where are these funds going to come from? Raising taxes is a no-no during a depression, borrowing is only going to increase inflation and the devaluation of the dollar which will follow will only further make consumers less able to spend.

It seems to me that what is needed is that the government reorder spending priorities so that existing funds have more of a multiplier effect. I claim that militarism is the least efficient way to apply stimulation. A bridge can enable more efficient commerce for the next fifty years in that region, a bomb has no economic benefit once it is built.

Why are the spending priorities of the government never discussed? I realize the Fed can't do anything about this, but there used to be something called congress and it could allocate funds. How about reviving projects with some payback such as was done in the 1930's.

It would seem that the free market ideology forecloses any such suggestions. What was wrong with the CCC, WPA or TVA?

How bad do things have to get before practicality trumps ideology. Just ask Herbert Hoover, I guess.

[donna]

The three main continents.

Well, there's a pretty good summary of what's wrong with western finance....

[Don]

Yes...a bit of fiscal stimulus to go along w/ monetary stimulus. But don't overdo either, and particularly not the monetary stimulus, at least not until prices start falling, as was the case in the "Great Contraction", as Friedman put it. Then we can (and should) start printing dollars again.

It is a matter of velocity. You need more dollars if the velocity of the old ones decline, and declining dollar velocity (i.e., less credit) is apt to be the hallmark of this contraction. Declining velocity is why the fed's lowered interest rates haven't caused wholesale domestic inflation--they seem to have added just about enough to keep the prices steadily inflating at a tame pace.

But before doing anything more, wait until you know a contraction is here, and I think the best signal of a contraction this time would be a decline in the commodities futures markets.

[btgraff]

"This suggests expanding in a controlled way the lending powers of quasi-public agencies such as Fannie May and Freddie Mac. Better that they should lose a bit when they help homeowners of modest means fend off foreclosures on their onerous mortgages."

i made a similar sort of proposal myself a few weeks back - bail out the homeowners who got suckered in, not the lenders (at least directly) and in doing so you prevent prices from falling further and creating a vicious circle.

what i wonder is, right now there are people buying foreclosed properties - what happens when they have bought all that they can finance and are trying to find new buyers?

[calmo]

So donna, you sayin "western finance" is missin continents?
Dang!
Maybe it's anaconda donna sayin that national finance bodies like the Fed have been swallowed by transnational finance...that doesn't need national fetters on its sooo beautiful innovations...thank you very much.

Burp...mighty cryptic of you donna, but before I take my Hank-sized severance package on unpackin your post, I can be redirected if I got this wrong.

[TGGP]

Herbert Hoover was not ideologically-driven to inaction. He bragged at the time of having presided over the most interventionist administration in U.S history, even if it didn't accomplish anything. Rexford Tugwell later admitted that the entire New Deal was basically extrapolated from programs begun under Hoover, which F.D.R attacked in his first campaign for President as resulting in an unbalanced budget.

[Bruce Wilder]

PS: "Balancing Market Freedoms"

The truly great Samuelson is invoking Aristotelian moderation, but I fear that too many will hear economic "trade-off" instead. Moderation, of course, is always to be recommended -- mix your poisons, as my mother used to say -- but "trade-off" is a faulty metaphor, when applied to developing and advancing schemes for effective control of economic "production" processes.

The critical choice in devising control schemes is not a trade-off between freedom and control, but in choosing between an authoritarian, but ineffective scheme, because it is easy to understand, and choosing a paradigm of multi-polar empowerment, within which ever more elaborate and effective schemes can emerge.

Power is the product of organizing to better control processes, but power does not need to be a zero-sum game. In a scheme of distributed control, i.e. as in a market system, many nodes of decision-making become more powerful as the system becomes better organized and increases its collective control over economic production and distribution processes; one could say that the over-all system becomes better organized, because the loci of distributed control become more powerful: better organization emerges, in part, from the opposition of loci, which are each becoming more powerful, and must negotiate better schemes of cooperative control.

To get down to cases, some have argued that financial innovation has been helpful and valuable, because it empowered people with credit, which might have otherwise not been available. The ability of an individual to, say, buy a house, was enhanced by a multiplication of loan products.

Others may complain that the same financial innovations have been associated with the emergence of an orgy of predatory lending.

A classic metaphor for this situation would be "trade-off". You have to give up "freedom" or individual power and flexibility in government regulation to protect against abuse. This metaphor is wrong and misleading. (On a fundamental level, a trade-off in economics is a movement along a possibilities frontier; increasing control, however, is a movement along a vector toward a frontier.)

The key to addressing predatory lending is to better balance opposing power.

Predatory lending took off, because we've been systematically reducing the power of consumer relative to business. The consumer has had less access to trustworthy information, less insurance, fewer legal protections and effective recourse options.

With credit card lending, take away interest rate ceilings and bankruptcy protection, and, voila, an explosion of predatory lending. With home loans, take away the bank's exposure to the risk associated with creating a long-term, illiquid asset, and then provide every incentive to increase fees, defraud buyers and to force foreclosures, and you get Countrywide.

My point is that progress lies in the direction of making every actor more powerful and more responsible -- a balance of power to achieve greater freedom in a more effective system, but not an illusory "trade-off" of control and freedom.

[anne]

"Rexford Tugwell later admitted that the entire New Deal was basically extrapolated from programs begun under Hoover, which F.D.R attacked in his first campaign for President as resulting in an unbalanced budget."

Complete rubbish, but keep trying.

[anne]

Herbert Hoover becomes President in 1929, with a Republican Congress for support through the presidency. Recession begin in August, though the economy has been slowly weakening for at least a year. Agriculture is especially weak and farm households relatively poor in income with land prices decreasing for several years.

Through the Hoover presidency the economy goes from recession to Depression, with the only legislative relief coming to minimal effect for agriculture in 1929. The Republican Congress enacts the Smoot-Hawley tariffs in 1930.

There is simply no presidential-legislative initiative to lessen the gathering effects of recession or Depression, save for the modest Agricultural Marketing Act of 1929. By 1932, unemployment is disastrously above 23%.

Franklin Roosevelt is fostering legislative relief for households in New York. Hoover is fishing.

The New Deal begin in March 1933.

[anne]

There were finally, the Reconstruction Finance Corporation and Federal Home Loan Bank Act in Depression's midst in 1932. These are at least reasonable precedents. Roosevelt is elected in November along with a Democratic Congress. Roosevelt was a whirl of experimental activity from the beginning of the presidency in March 1933. From the "hundred days" beyond March on, the New Deal is astonishingly active.

[anne]

Rexford Tugwell was Roosevelt's agriculture secretary (I wonder if John Kenneth Galbraith ever worked with Tugwell), and was instrumental in continually focusing Roosevelt's attention on the needs of farm households and on the land as environmental conditions worsened early on in the New Deal.

(I think there were extensive interviews of Tugwell available.)

[anne]

http://www.nytimes.com/books/00/11/26/specials/schlesinger-age2.html

January 4, 1959

Two Years That Shaped Our Lives
By HENRY STEELE COMMAGER

THE COMING OF THE NEW DEAL
Vol. II of "The Age of Roosevelt."
By Arthur M. Schlesinger Jr.

Here, following swiftly after the first, is the second volume of Arthur M. Schlesinger Jr.'s history of the Age of Roosevelt. Spacious and monumental in form, scholarly and authoritative in character, spirited and affluent in style, it promises to be one of the major works in American historical literature.

This volume covers only the first two years of the Roosevelt Administration, and not even the whole of them, for foreign affairs are reserved for later treatment. But what anni mirabiles they were! Those who lived through them can still recall the electric excitement, the surging vitality, the mounting hope, the exhilaration that came over the American people after years of futility and frustration. It was, said Rexford Tugwell, "a time of rebirth, after a dark age."

These two years fixed the pattern of American politics down to our own time. There was, to be sure, no break in the continuity of history; the New Deal had roots in the past, as had Roosevelt himself. But the New Deal was, too, a distinct epoch-as distinct, surely, as the Jacksonian or the Progressive eras, the two earlier periods with which it is most closely connected. We can see its significance now better than we could at the time: it ushered in the welfare state; it repudiated laissez-faire; it marked the rise of labor to a position of equality with industry and capital in our economy; it shifted the center of gravity from state to nation, and -less clearly-from legislative to executive authority; it coincided with (rather than caused) the emergence of the United States as a dominant world power.

IT is instructive, in this connection, to put down the things we now take for granted, but did not take for granted even a generation ago: the responsibility of government to regulate the economy, to support agriculture, to provide for job security and social security; the right of workingmen to organize in unions of their own choosing; the prohibition of child labor; the development of hydroelectric power under government auspices; the guarantee of bank deposits; the regulation of securities; slum clearance; Federal aid to public health and education. These and many other things are now the common sense of the matter. But they were not the common sense of the matter in March, 1933; to a great many Americans, then, they were alien and pernicious and they spelled ruin and death.

Mr. Schlesinger has recreated, in rich and wonderful detail, the major debates experiments, struggles, accomplishments-and failures-of these two hectic years. Relief, recovery, reform-these were the motivating principles, but they were not separate and in sequence; they were inextricably scrambled in an avalanche of legislation and regulation and improvisation. Here, in circumstantial detail, is the story of the National Recovery Administration; of the triple-A (Agricultural Adjustment Administration) and the attack on farm tenancy; of the Tennessee Valley Authority and the effort to harness water power for broad social and economic purposes; of the Civilian Conservation Corps-Roosevelt's own brain child-and its astonishing accomplishments.

Here, too, is the story of relief, under its various alphabetical auspices; of the formation of new labor policies; of the emergence of social security; of the control of money and banking and securities exchange; of the devaluation of the dollar and the fiasco of the London Economic Conference, and of a dozen other enterprises all transforming the economy and the society of the nation, and even its physical features. It is a tribute to Mr. Schlesinger's literary talents and to his orderly intelligence that in all this he steers skillfully between the Scylla of analysis and the Charybdis of anecdote, and gives us history with appropriate ingredients of narrative, drama, biography, analysis and interpretation. ("The Coming of the New Deal" is the January Book-of-the-Month choice.)

What emerges from this swift and crowded narrative? First, there is the fact that the New Deal was very much in the American tradition and the American grain, in method, in character and in leadership. There were few contributions form Europe and-despite the presence of a handful of Communists-none from communism. The whole enterprise was based on antecedents in the Progressive and Populists eras, on the experiments in states such as Wisconsin and Oregon, on the contributions of social workers and reformers and conservationists who had been working for a generation with native materials. This is why almost the whole of the New Deal was so easily incorporated into the fabric of American politics and life.

EQUALLY impressive is the deeply conservative character of the whole enterprise. It was, clearly, a work not of revolution but of restoration. Its historic function was not to inaugurate but to save-to save the structure of the banking system; to save corporations and big business; to save the land, the trees, the water; to save farms and farmers; to save and revive the political machinery, and even the constitutional....

[Jay]

Samuelson, what a hack....
"But financial panic engendered by the burst bubble of unsound U.S. and foreign mortgage lending means that even a mammoth corporation like General Electric would find it expensive now to finance a loan needed to build a new and efficient factory."

I can understand why economist make predictions and they don't pan out. But Samuelson makes a statement that flies in the face of everything that occurred in the markets with respect to GE during the recent financial crisis.

[paine]

anne

mr c as in cold war liberal

"The whole enterprise was based on antecedents in the Progressive and Populists eras"

the socialist movement also pure american
at least till 1919
is the third leg of this new deal stool

as to his great eras
i prefer the implication of his text

ie

the new deal was
the culmination of a process begun
perhaps as early as the big d of the early 1870's
a process at once reactionary and reformist
to moderate the onslaught
of our industrial juggernaut

the usual kold war cross reference
to andy jackson's era
never really struck roots
and as to an actual progressive era
prior to the new deal...
what ??

TR's pr ???

the first term of wilson ???

god forbid

that two headed snake dance
is still revealing
the effects of its venom
we had no effective progressive era
at the federal level

and if state based progress implies also state based regress ---as it did--

then as a nation what had we ???

[paine]

paul s
like some antique knight
claps on his armour
for one last sally
against what look to him
like the same old frost giants

irony can not consume
the noble pathos of it

[paine]

mr c
"This is why almost the whole of the New Deal was so easily incorporated into the fabric of American politics and life. "

wishful thinking
its all much clearer now of course
the corporate system has attacked
the new deal like an alien transplant
trying to reject it
and
with the grotesque potential consequences
---possibly killing the host-self off----
hardly detering their mindless
systemic " immune reaction "

[BJ Feng]

"My point is that progress lies in the direction of making every actor more powerful and more responsible -- a balance of power to achieve greater freedom in a more effective system, but not an illusory "trade-off" of control and freedom."

Haven't the new financial innovations achieved just that, make actors more powerful? Look at all the new options available to the borrower, zero down, interest only, no doc, option ARM, etc. Don't these new choices make the individual more powerful? Yet where is the acknowledgment of responsibility you advocate?

I also could have taken an option ARM and paid interest only, but I chose the 15-year fixed mortgage instead. Some of my friends chose the interest only ARM because they were speculating.

The individual borrower has never been this powerful before. As other bloggers have said, the recent lending gave borrowers a call option on home prices for next to nothing. If prices didn't increase, they'd just walk away and many have. Thanks to the Truth in Lending disclosure, the APR including the commissions and such has to be shown to the borrower. I would welcome more disclosure, but I don't see how this has benefited the large banks, or is evidence of some sort of gain in power.

Yes selling and repackaging loans caused risky loans to be originated and packaged, but that mistake is at an end. The buyers of these bonds will not be "fooled" that easily again, so the problem has already been solved. And how? Huge loses, basically a severe spanking from the market that will be remembered for some time.

[Bruce Wilder]

BJ Feng, it is truly said, you don't know what you don't know. Go in peace.

[anne]

Paine,

Please explain what I think was an interesting comment but is not complete enough for me to be sure. Are you concerned with Schlesinger as historian or Commager as reviewer or my direction? I have finished reading through Schlesinger on the New Deal.

[anne]

http://www.nytimes.com/books/00/11/26/specials/schlesinger-roosevelt.html

September 11, 1960

Just Before F.D.R. Became 'the Champ'
By D.W. BROGAN

THE POLITICS OF UPHEAVAL
Vol. III of "The Age of Roosevelt."
By Arthur M. Schlesinger Jr.

On the night of Election Day in November, 1936, President Franklin D. Roosevelt sat at Hyde Park waiting for the election returns. He was optimistic; he had reason to be. But when he got the first returns, learned that he had carried New Haven by 15,000, he was incredulous. When it was confirmed, he could only say, "Wow!" Yet though this book ends with the greatest electoral triumph in American history, it is not a story of a foreordained political triumph. The Roosevelt of legend, the unbeatable champion of four Presidential contests, is not yet here.

It is one of the many merits of this brilliant book, the third in the author's "The Age of Roosevelt," that Arthur M. Schlesinger Jr. does not indulge in foresight, does not project into the future the often harassed, sometimes nearly despondent, uncertain leader who found that the honeymoon of the New Deal was over, that the magician's bag of tricks did not hold the one most necessary, the way out of economic stagnation, and could not be certain that the American people would not turn to other magicians with more potent and more plausible spells.

Historians have long been accustomed to distinguish between the first New Deal and the second. They have put the shift in slightly different places; but the death or suicide of the National Recovery Administration in 1935, the collapse of the idea of free democratic national planning, marks the end of one era, the beginning of another. The hopes of 1933 were dimmed by the end of Mr. Schlesinger's second volume, "The Coming of the New Deal," which covered the years 1933-34. The old Adam of toughly competitive business or, if you like, of competently collaborative "oligopoly" had shown himself to be very much alive. The months in which "none were for the party and all were for the state" were in the past. So were the transient days when "the rich man helped the poor and the poor man loved the great."

Class struggles, sectional struggles, party struggles were being resumed with more than the old intensity, and if F.D.R. had dallied with the idea of being the leader of a united nation, that idea was visibly a pipe dream, an obstacle to action by the end of 1934. The Republican Party was back in business - and unconverted. Big business was big, convalescent. Big labor was taking the first of what proved to be giant steps. Some problems proved less tractable than they had been in the dark days of early 1933, when the American economy seemed to be grinding to a halt....

[anne]

http://www.nytimes.com/books/00/11/26/specials/schlesinger-crisis1957.html

March 3, 1957

After the Decline and Fall, the Promise of a New Day
By HENRY STEELE COMMAGER

THE CRISIS OF THE OLD ORDER, 1919-1933
Vol. I of "The Age of Roosevelt."
By Arthur M. Schlesinger Jr.

It is a quarter of a century now since Franklin Roosevelt promised a new deal to the American people, and a whole generation has come to maturity that knew nothing of the excitement of that promise an its fulfillment. But Roosevelt is still very much with us; his name is still an incitement; the meaning of his career is still hotly debated. There is no assurance that time will change this; after all, the historical role of Theodore Roosevelt and Wilson and, for that matter, of Jefferson and Jackson, is still hotly debated.

A quarter of a century, however, is time enough to dispel some of the myths that have accumulated around the crisis of the early Thirties and the emergence of the New Deal. There is, for example, the myth that world conditions rather than domestic errors and extravagances were entirely responsible for the depression. There is the myth that the depression was already over, as a consequence of the ministrations of the Hoover Administration, and that it was the loss of confidence resulting from the election of Roosevelt that gave it new life. There is the myth that the roots of what was good in the New Deal were in the Hoover Administration - that Hoover had actually inaugurated the era of government responsibility for the health of the economy and the society. There is the contrasting myth (for myths do not require inner consistency) that the New Deal was alien in origins and in philosophy; that - as Mr. Hoover put it - its philosophy was "the same philosophy of government which has poisoned all Europe: the fumes of the witches' cauldron which boiled in Russia."

Arthur Schlesinger Jr. devotes a substantial part of the first book of his projected four volume "Age of Roosevelt" to dispelling these myths. This involves an inquiry into the origins of the New Deal practices and principles, an investigation of conditions - chiefly economic - in the Twenties and a thorough re-evaluation of the Hoover Administration.

Mr. Schlesinger, who is Professor of History at Harvard and author of "The Vital Center," makes clear that the causes of the depression are to be found chiefly in the malpractices of our own Government during the Twenties - the failure of government to adjust itself to profound technological changes; the search for economic self-sufficiency; the bankruptcy of a philosophy which clung tenaciously to shibboleths like the balanced budget and the gold standard, and which persisted in trusting local initiative and distrusting national enterprise.

He makes clear that the depression was getting worse, not better, in 1931 and 1932, and that the Hoover Administration was all but paralyzed in the face of a crisis that quickly became a disaster. Caught between a passion for a balanced budget and rugged individualism on the one hand and a desire to aid business and stimulate public works on the other, the Administration in effect threw up its hands. It abandoned public works; it gave up on farm relief; it set itself like flint against projects like the TVA; it put its faith in high tariffs; it stood by impotent while thousands of banks closed their doors. Where it gave aid it was to a few favored banks and corporations; the RFC lent $90,000,000 to one Chicago bank, but President Hoover vetoed a bill for relief to the unemployed with the observation that "never before has so dangerous a suggestion been seriously made in this country."

In the bright sunshine of prosperity we have tended to forget, many of us, how black the desperation was; it is one of the merits of Mr. Schlesinger's book that it re-creates for us so vividly this tragic chapter of our history. By 1932 there were 18,000,000 unemployed, but less than one-fourth of these were receiving public aid. In Gastonia, N.C., 14-year-old girls worked sixty-six hours a week for $4.95; lumber workers got 10 cents an hour; Connecticut sweatshops hired girls for $1.10 for a fifty-five hour week. From 1930 to 1933 9,100 banks closed their doors. The president of the National Association of Manufacturers announced that the unemployed mostly didn't want to work; Samuel Insull, with eighty-five directorships and sixty-five chairmanships, went about with a bodyguard of thirty-six men; the Morgan partners paid no income taxes during these depression years, and President Hoover said to Raymond Clapper, in February of 1931, that "If someone could get off a good joke every ten days I think our troubles would be over." ...

[elvis]

Anne,
If only Eleanor had run....

[anne]

Eleanor Roosevelt was truly an American inspiration, as visionary a thinker and actor as I am aware of. I would admire Franklin Roosevelt simply because of Eleanor, though I admire both. There is a cartoon I must find of working coal miners thinking they must be on best behavior because Eleanor Roosevelt might be coming by just for the sake of coming by. (I am sure my memory of the cartoon is off, but that is my fond impression.)

[pgl]

Mankiw links to Samuelson's piece and then call Samuelson a textbook author. Well yea - he did author a very good Principles text but the contributions of Paul Samuelson go well beyond this textbook. It's like saying Michael Jordan's athletic career including playing golf.

[Anish]

Two things: Under no circumstances whatsoever should there be intervention by government. It's all too easy to blame the fault on lenders - after all, borrowers share some of the blame too. If you are getting a hundred thousand dollar mortgage, surely you can be bothered reading the actual documentation? If a bus driver is willing to lie that he is making 6-figure incomes, surely he is as guilty as the lender?

Also, I don't get the point of not letting all these CDOs go to the market. Point is we need market prices - sooner rather than later - to know how much this damn thing is worth! Once we start getting real prices (no sweetheart deals or SIVs), things will be brutal but you'll at least know where you stand. It's like a high school dance: all we are waiting for is some crazy fool to start dancing...

[anne]

"If a bus driver is willing to lie that he is making 6-figure incomes, surely he is as guilty as the lender?"

Show us the least evidence of such lying; I am all aflutter waiting for the least evidence of lying bus drivers.

[Mario Brinacci]

Cecchetti wrote a kindergarten book on banking, with contrived
simplifications whose distinctions are arbitrary. Then he wrongly
says the Fed prints money. He says Euromoney was created to protect
soviet interests. He says underwriters guaranty IPO prices. He says
Glass Steagall restricted the "economies of scope" which he says
caused the Great Depression. He bypasses modern problems with
transaction costs with is simplistically sweeping statements.
Institutions who use this textbook should not expect their graduates
to obtain serious jobs. In fact, accreditors should examine student
exam papers at such institutions to see if they really learned
anything. Any institution using this book should be liable for
malpractice as your kid will fail any chartering exam studied for with
this book. As for Cecchetti himself, he should be run out of town,
made to return to his dead soviet masters. We should not be in the
business of propogating more useless ditzy educators who deliberately
resist productive contributions but instead sabotage society through
misinformation. This book is a great example of why students should
be expected to take standardised examinations on their majors before
(or instead of) obtaining degrees. This textbook is proof of the
abject bankruptcy of American academia whose affected self-propogation
and self-preservation sabotages our society.