Hoovernomics Revisited

October 21, 2008

Herbert Hoover is recognized as one of the worst presidents in American history.  The historical depiction of his non-handling of the Great Depression is legendary.  We have all been taught that he was a do-nothing executive who let the country’s economy fall apart at his feet.  Further, if Franklin Roosevelt had not thumped him in the presidential election of 1932 the United States would have eventually been reduced to a fifth world cesspool.  This historical account taught to millions of American public school students each year cannot be farther from the truth.  In fact, Hoover’s activist policies during the Great Depression are the real reason he was a horrible president and it’s a shame our current leaders learned nothing from his folly during the early 1930s.  

The goal of Hoover’s economic policies after the onset of depression was to re-inflate prices back to pre-depression levels.  He sought to achieve this through two mechanisms – government spending and credit expansion.  Sound familiar?  First of all, he instituted a federally financed program of public works.  The concept was supposed to put money in peoples’ pockets so they could spend their way to recovery.  By 1932, this scheme nearly doubled federal construction projects from 1929 levels.  The program was very expensive by 1930s standards – $1200 per aided family.  The biggest problem with federal public works, as far as Hoover was concerned, was that the program was unavailable to those hurting in remote parts of the country and to those folks unable to perform such labor.  Of course, the real problem, economically speaking, with make work schemes, is that they do not work in stimulating a beaten down economy.  

Instead of continuing the program, his administration increased federal relief aid to the states so they could carry out projects that would aid displaced workers.  The increase in aid was phenomenal in such a short period of time.  In 1929, aid to the states totaled $33 million.  By 1931, the figure rose to $173 million.  By 1932, aid was $308 million, which represented an astronomical amount at the time. 

Then there was Hoover’s Reconstruction Finance Corporation (RFC) which was approved by Congress in 1932.   In that year, the RFC made $2.3 billion in loans to banks, railroads, and farmers.  Most of the money went to paying off debts, supposedly to ensure the solvency of the credit markets.  Still more money flowed from the RFC to the states to further finance make work schemes.  In addition, $25 million was allocated to the Treasury Department so it could invest in the stock of the 12 newly created Federal Home Loan Banks.

So, contrary to popular belief, Herbert Hoover, for his time period, was a radical government spender and interventionist in the economy.  Indeed, this article has only represented a few of the more egregious measures of his administration.  Without question, Roosevelt’s New Deal was much larger and more comprehensive a program. But, what is important to understand is that both Hoover and Roosevelt’s policies are what put the “Great” in Great Depression by prolonging the recovery by about 15 years.  The increased government spending of the time, like this year’s stimulus package, did nothing to spur recovery.  The expansion of credit through the RFC and FHLBA was as effective as current Fed and Administration policies will be in restoring faith in the banks and getting the economy moving again.  Tighten your belts, because If Bush is our Hoover and Obama is going to be our Roosevelt, then we are in for many years of economic despair.


The Best Laid Plans of Mice and Governments Often Go Astray

October 18, 2008

The founders of the United States were brilliant human beings who developed and left us a framework for existence that we continue to ignore to our detriment.  The framework I am talking about, of course, is the Constitution.  In the current economic crisis, the regime in D.C. is ignoring it by devising new ways to “stabilize” our economy.  The harmful effects of which are already appearing.   

According to Bankrate.com, average mortgage rates on 30-year fixed home loans have increased more than one half a percentage point to 6.74 percent in the last week.  This represents the largest weekly increase since April 1987, when the 30-year rate rose 0.84 points.  For the average borrower with a $200,000 loan, this means they will pay $1,296 a month – an increase of $100 more a month and $1,200 more a year than the same loan would have cost just a few weeks ago.

But, weren’t the policies enacted by the Bush Administration, Federal Reserve, and Congress supposed to “unfreeze” the credit markets and relieve the pressure on our financial system so that it could work again?  The answer is yes, but once again, the unintended consequences of federal actions have prevailed.  You see, in order to fund Washington’s rescue of the economy and the new government debt guarantees, the Treasury is selling a bundle of new Treasury bills to raise money (more debt).  Treasury has to offer higher interest rates to sell these debt assets and since mortgage rates move in step with 10-year Treasury yields they have risen with the actions of Paulson, et al.

Additionally, because Uncle Sam is guaranteeing bank debt, it is becoming more attractive for investors and creating more competition for his own firms – Fannie and Freddie, when they seek to sell their securities.  To compete for investors, the nationalized companies must raise their own yields and then charge borrowers higher rates for mortgages.  As a matter of fact, mortgage rates are higher now than they were before the Fannie/Freddie bailout was launched.  Naturally, this was not the government’s intention, just the consequence of its actions.

Rates are expected to decline as credit availability increases due to the liquidity added by the feds.  This won’t help those homeowners whose adjustable rate loans are due for adjustment in the near term.  And before we get too excited about easy money again, let’s not forget that in the long term the Federal Reserve will have to raise rates, probably significantly, to fight the inflation that will emerge as a result of the Treasury’s spending right now.  What this situation will mean for the foreclosure rate in this country is clear – it will go through the roof.

If only our leaders would read the Constitution before they take an oath to it.  They would learn that it does not allow the federal government to transfer wealth, bailout industry, or own banks.  The founders knew that to give this authority to the politicians would infringe on the rights of citizens and screw up the economy.  Recently, while reassuring the American people that the United States was not fundamentally changing its economic system through all of this government intervention, President Bush said, “democratic capitalism is the greatest system ever devised.”  I suggest the President heed his own words and let our free market system fix itself.

Congress is a Rotten, Stinking Corpse

October 12, 2008

At the end of August, Rasmussen Reports released data from a poll it conducted on the approval rating of Congress.  The poll found that an incredibly anemic 9 percent of Americans surveyed felt that Congress was doing an excellent or fair job.  You heard right – only 9 percent of Americans approve of the way Congress is doing its job!  This is the lowest approval rating of any Congress since the statistic was first kept track of in the 1970s; and it was taken before Congress passed Bush’s Big Bank Bailout Boondoggle so does not reflect probably an even lower view of Congress today.

With these poll numbers most Americans agree that Congress is not doing its job.  But, let’s be honest; the current Congress is a rotten, stinking corpse.  It has worked against the will of the American people, legislated against the best interests of our country, and totally abdicated its sacred responsibilities by giving the President, Treasury Secretary, and Federal Reserve chief carte blanche in further ruining our economy all in the name of political expediency and campaign contributions.

Take the $800 bailout package for instance.  Congress passed this measure in the face of at least 70 percent opposition from the American people.  Whatever happened to representative government?  It was discarded for campaign contributions.  The Washington watchdog group, Center for Responsive Politics, reported that the senators who voted for the bailout have received on average contributions to their campaigns totaling $3,986,723 since 1989 – this is 139 percent more than was received by those senators opposing the bailout over the same time period.  To give a specific example, Sen. Joe Lieberman of Connecticut supported the bailout while receiving nearly $10 million from the finance sector over his career; Sen. Bernie Sanders of Vermont opposed the bailout while receiving just $167,045 while in Congress.

The behavior of House members is better, probably owing to the fact that all members are up for reelection this November, but still a correlation exists between contributions from Wall Street and voting for the bailout.  House members who voted for the corporate welfare to Wall Street received an average of $833,077 from the finance sector since 1989 as opposed to $589,417 for members who opposed the scheme.

Of course, we were told by our “leaders” that the measure was necessary to “unclog” the credit markets, thereby saving the economy from total collapse, and consequently protecting the assets of ordinary Americans.  Nonsense!  The bailout will do no such thing.  During the Great Depression, the government instituted similar measures to revive the economy; this included government spending to increase aggregate demand (stimulus package anyone?) and injections of government debt to stabilize prices and the banking industry.  Sound familiar?  These measures in the 1930s prolonged the recovery all the way to 1939.  They will also delay a recovery today.  One of the following three things is true about our “leaders”: they don’t know history; they think it will be different this time, or they care more about their political futures than the constituents they have sworn an oath to serve.  You decide.  In any case, all three are good reasons to throw the bums out this November.

But, perhaps the biggest outrage from Congress’s behavior over the last 10 months is its abdication of Constitutional responsibility.  It has allowed the Fed and Treasury chiefs to bailout Bear Stearns and AIG, nationalize Fannie Mae and Freddie Mac, and potentially buy up vast sums of corporate debt – all without a Congressional vote.  With passage of the bailout scheme, the Fed and Treasury are now authorized to invest capital into financial institutions and get ownership in return.  Paulson and Bernanke have effectively become the nation’s stockbrokers.  Additionally under the bailout scheme, foreign banks doing business in the U.S. are eligible for Treasury payments, which means Uncle Sam will be borrowing more from foreigners to bail foreigners out.  Not only has Congress violated the constitutional principle of separation of powers by giving authority both directly and through acquiescence to unelected officials in another branch of government to do what they are not constitutionally authorized to do, it has also condemned us and future generations of Americans to more debt and a lower standard of living.    

This November 4th Americans all over the country will have an opportunity to vote for every representative in the House and at least a third of the Senate.  With some rare exceptions, they should vote their members out of Congress and not replace them with a reasonable facsimile thereof from the other major party.  Americans should vote for minor party candidates because America desperately needs a multiparty system like the ones we have fought for in other countries – most notable Iraq.  Only then can the will of the American people, not the narrow interests of Wall Street be heard.  Only then can the best interests of our country be served; and only then can we have a representative legislative body that will be less apt to abdicate its sacred responsibilities to the people.  Yes, Congress is a rotten, stinking corpse.  With its job approval rating at 9 percent, maybe the time is right for giving it a proper burial.

Congress Has Sold Us Out to the Big Banks

October 3, 2008

Ronald Reagan said, “Government’s view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it”.  Even before Bush’s Big Bank Bailout Bill was passed by Congress we were in the “subsidize it” phase of the cycle.  We have been told by our “leaders” that more subsidizing through the bailout legislation is in the best interest of the millions of Americans in the middle class.  It was done to preserve our savings accounts, education and retirement funds and to help small business in securing the necessary loans they need to survive.  It was done to rescue us from economic calamity.

In fact, the $700 billion bailout (ignoring the pork and tax breaks which make the legislation worth more than $800 billion) will only do harm to the middle class.  First of all, this $700 billion dollars is in addition to nearly $1 trillion that the Federal Reserve has already pumped into the economy in just the last month.  Secondly, where will the Treasury get the money called for in the bailout package? Answer: it will borrow the money from the banks.  But, I thought the banks had no money, hence the need for the bailout.  They don’t, so they will create the money through a system called fractional reserve.  In addition, because the banks are a cartel headed by the Federal Reserve they can also fire up the printing press to produce dollars.  The banks will loan these new dollars to us, with interest, so we can then give the money back to them.  The nearly $1 trillion already pumped into the economy by the Fed and the new funds called for by the bailout package are an artificial increase in dollars.  Of course, the banks will get to use the new money first before inflation sets in and then the rest of us can borrow the money back (again) from banks at higher rates because of the inflation.  The banks can’t lose.  If you think this is a good deal for middle class Americans then you probably own one of the subprime mortgages that got us into this mess in the first place.

In addition to the government using our money to get us into an insane financial arrangement with the banking industry, the bailout will not solve our economic problems and indeed make them worst.  How does throwing borrowed money at bad assets make any sense?  It is equivalent to borrowing money and then flushing it down the toilet.  If the bad loans that the bailout is going to purchase had any value they would have been bought on the open market at some price.  They have not been bought so it is safe to assume that they lack any value.  Consequently, the bailout will simply relieve the banks of the ramifications of their bad behavior and leave taxpayers holding a bag of worthless assets.  When the Treasury writes off these assets, the loss to the federal treasury will be well over a trillion dollars (this includes bureaucratic costs, opportunity costs and interest costs on the $700 billion).  Folks, Uncle Sam already owes over $9 trillion dollars with at least another $50 trillion of future obligations through entitlements.  It is only a matter of time before these debt obligations have to be met.  Because foreigners will be unwilling to lend us any more money and the Federal Reserve will be unable to print more because of hyperinflation, the politicians will have to raise taxes.  High taxes in recessionary times will be the death knell for our economy.

And don’t think that future misallocations of resources won’t be encouraged by this federal largess.  It has already begun to happen.  Bank of America probably bought Merrill Lynch with its bad assets to ensure that it was “too big to fail”.  Citigroup and Wells Fargo will fight to the death for the right to buy Wachovia and its $74 billion of bad assets because they both know that the Treasury will now offload those bad assets onto the taxpayer.  Once these bad assets are removed from the balance sheets of the banks what guarantees are there that they won’t turn around and make more high risk, bad loans?  Aren’t the banks still under the federal mandate through the Community Reinvestment Act to make loans to high risk debtors?  By passing the bailout package hasn’t Congress shown that it will be there for the banks when they fail?

The bailout package will prove to be harmful for the middle class.  It will cause inflation, burden taxpayers with hundreds of billions of dollars in bad assets, and encourage irresponsible economic decisions.  Someone also once said, “the more you subsidize something, you more you get of it”.  By subsidizing the bad decisions of Wall Street we can only expect more of the same bad decisions.