The book, which appears as fair-minded to all parties as one could imagine, makes the point that Hoover believed in the trickle-down theory that the most important role for the Federal Government was to sustain the financial structure.
This is so "right-on" in relevance to the failures of the multiple Fed, Bush/Paulson and Obama/Geithner, and Congressional actions that it is scary.
In the Depression vein, perhaps the most widely-read book on the Great D ("The Great Crash of 1929") was written by John Kenneth Galbraith, a Canadian economist who helped administer wage-price controls during WW II for FDR and ended up a hugely influential liberal economist in the post-War era.
His son, James Galbraith, is another economist, and is similarly liberal.
In "No Return to Normal" in the current Washington Monthly, Dr. Galbraith fils implicitly accepts the argument made in this blog that we are looking at an emergency similar to, though currently milder than, the Great Depression, and argues for massive government spending.
His article is quite long and "important" and thus not an easy read. Here is a partial summary with (of course) EBR editorial comments:
First, he argues that the Obama/Geithner team is far too enamored of the Larry Summers/Robert Rubin Hoover-like approach toward favoring the big financial institutions over direct assistance to individuals and smaller governmental units that are dealing in various ways with this economic Banana.
Ed: Good for him!
He then goes on to praise World War II for helping the economy by forcing people to live so penuriously that they had to save and thus could spend later. He proposes more of the same now, potentially for decades.
Ed: This is wrong-headed. Starve now, prosper later is his prescription. Simpler and favored: do take down the corrupt self-serving financial institutions that are basically vehicles to enrich the insiders by financializing everything they can, but create a balanced economy built upon savings but not to the level of non-consumption imposed by the Government on a suffering populace in the War.
It is also wrong-headed in that he also perpetuates the myth that it was War spending that brought on prosperity. Just ask any German or Japanese if they enjoyed post-War prosperity, even though their governments also spent big-time during the War. No, Dr. Galbraith, War is Hell and is horrible for the economy. Winning the biggest War in history and being essentially the only undamaged major economy did, however, allow the winner to enjoy the spoils. It was the big win in the War in both the Western and Pacific fronts that brought prosperity to this country, which has now largely been squandered by decades of living beyond our means.
The Galbraith article goes on to say:
A brief reflection on this history and present circumstances drives a plain conclusion: the full restoration of private credit will take a long time. It will follow, not precede, the restoration of sound private household finances. There is no way the project of resurrecting the economy by stuffing the banks with cash will work. Effective policy can only work the other way around.
This is a direct attack on Barack Obama's own words, which have been criticized in this blog, that credit is the fundamental factor that makes the U. S. economy run. Instead, the current answer, it is argued here, is profits and savings are the key to a successful capitalist economy. Out of those efforts come the capital that can then be lent should there be worthwhile projects that deserve capital. Unfortunately, Galbraith describes the current situation as well as the past:
During the 1930s public spending was large, but the incomes earned were spent. And while that spending increased consumption, it did not jumpstart a cycle of investment and growth, because the idle factories left over from the 1920s were quite sufficient to meet the demand for new output.
Ed: There are plenty of shopping malls, houses, condos, auto factories, domestic and foreign clothing suppliers, food growers (and too much food consumption), etc. That is why less production is "OK" for now; in such times of adjusting to a more sustainable balance between production and ability to pay for that production, support for those who would like to work but can't find work due to the economic slack is important. Just think of all the hundreds of billions of dollars spent on AIG, Citi, BofA, Deutsche Bank etc. by the Fed and the Feds that could have been spent directly on individuals. It makes the blood boil. It is the Hoover approach, and it continues under Barack Obama and a Democratic Congress. Even the AIG bonus diversion is exactly wrong in that it deliberately ignores the vastly larger Federal payments to AIG and its (often foreign) counterparties, while penalizing the individuals involved, who at least have flesh and blood and may or may not have been responsible for the malfeasance at AIG.
The good doctor and I agree on one point that this blog has advocated, which is the importance of small-to-medium-sized banks that act conservatively, as many such banks have done over the past several years:
Ultimately the big banks can be resold as smaller private institutions, run on a scale that permits prudent credit assessment and risk management by people close enough to their client communities to foster an effective revival, among other things, of household credit and of independent small business—another lost hallmark of the 1950s. No one should imagine that the swaggering, bank-driven world of high finance and credit bubbles should be made to reappear. Big banks should be run largely by men and women with the long-term perspective, outlook, and temperament of middle managers, and not by the transient, self-regarding plutocrats who run them now.
He agrees with EBR and the non-partisan Economic Cycle Research Institute about the low risk of high inflation in the short to medium term:
Third, in the debt deflation, liquidity trap, and global crisis we are in, there is no risk of even a massive program generating inflation or higher long-term interest rates. That much is obvious from current financial conditions: interest rates on long-maturity Treasury bonds are amazingly low. . . They are . . . worried, as I am, that the larger economic outlook will remain very bleak for a long time.
Dr. Galbraith makes a lengthy justification, as do Paul Krugman and Nouriel Roubini, for massive deficit spending, near the end of his piece. While he and I part company on that point, what is striking is how broadly across the political spectrum come the criticisms of the current Administration on its handling of the financial crisis and also how widespread are the fears of longer-term economic malaise.
Dr. Galbraith and DoctoRx at EBR agree that the Bush-Obama approach of "large complex financial institution uber alles" and their policy of trying to resume unsound lending practices is a huge mistake.
Until this huge mistake is corrected, it follows that from an investment standpoint, I just can't convince myself that becoming an owner American corporate enterprise through the rigged, insider-run casino known as the stock market is a prudent use of anyone's capital at prices anywhere near today's.
Copyright (C) Long Lake LLC 2009
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