Ghosts of the Great Depression
By
Bill Bonner Oct 03, 2008
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Time for a bail-out... or an exorcist!
"Liquidate labour, liquidate stocks, liquidate the farmers, liquidate real estate... It will purge the rottenness out of the system... values will be adjusted, and enterprising people will pick up the wrecks from less-competent people." That is the advice from a ghost – US Treasury Secretary Andrew Mellon. But this is 2008, not 1928... the climate has changed. This week began with heavy weather – and got worse. Over on the continent Fortis was going under. And here in British waters, the government had a rescue helicopter hovering over Bradford & Bingley. The Baltic Freight Index ran aground on the coast of Brazil, after the Chinese refused to kowtow to Vale's new price demands for its iron ore. Shipping costs went down by 25% last week – 10% on Friday alone. Apparently, the Chinese turned off their heavy factories before the Olympics; now, they can't seem to find the switch to get them going again. House prices are falling faster than ever in the US. In Britain, the average house is falling by £93 a day; the average wage is only £65 per day.
We do not usually advise governments. To be fully transparent about it, none has ever asked. It is enough to try to advise MoneyWeek readers. If we were to try to save the world's financial system, at least we would ask more than a lousy £2.50 a week. Still, in the spirit of public service we undertake to unclog the following drain. Taking into account even the most "severe assumptions" on default rates, Barron's columnist Jonathan Laing calculated that Paulson's bail-out plan would have given the Feds "positive carry" (the difference between the cost of borrowing money and what you earn from it) of at least 7% or 8%. He figured that the government would have ended up with a $75bn profit in two years.
But even with the hope of profit before it, the House of Representatives rejected the plan – and then, the hurricane winds blew even harder. The world's stock-markets had their worst day ever. The choice is clear, warned a flange of kibitzers: either a bail-out bill or a Great Depression. Most likely, Congress will vote for the former and get something close to the latter.
By Wednesday, scores of commentators had been to the cemetery. Most were channelling Franklin Roosevelt. He "understood that his first job was to restore confidence", wrote David Brooks in The New York Times. Over in the FT, Martin Wolf even quotes Roosevelt's puerile remark that "the only thing we have to fear is fear itself". What about 25% unemployment, one is tempted to ask? "We might have done nothing. That would have been utter ruin. Instead we met the situation with proposals... of the most gigantic programme of economic defence and counterattack ever evolved in the history of the Republic... Some of the reactionary economists urged that we should allow the liquidation to take its course until we have found bottom... We determined that we would not follow the advice of the bitter-end liquidationists..."
That quotation comes neither from Paulson nor Roosevelt, but from another intervener. Herbert Hoover has got the reputation for being a "do nothing" president. Would it were so. When the Hoover passed the baton to Roosevelt, his can-do meddling had already helped turn a financial crisis into a Great Depression. Ghosts are often morons. Poor Andrew Mellon was shouldered aside in the early '30s. Hoover got to work. His first improvement is known to us by two knuckleheads who turned it into law – Misters Smoot and Hawley. The idea was to protect US business by imposing higher tariffs on foreign trade. A group of 1,000 economists, bankers and other notables realised that blocking trade at the onset of an economic slump would be suicide. They urged him to veto the bill. But Hoover believed in tariffs as he believed in almost all other forms of government interference. He signed the bill with approval.
He called on the Fed to provide "an ample supply of credit at low rates of interest", and initiated a programme of public works – including the Hoover Dam, a massive lump of concrete that blocks the Colorado river. He threatened federal regulation of the New York Stock Exchange and attacked short selling. Hoover's chief concern seemed to be to hold up the price of labour. He cut off immigration, in an effort to keep out wage competition. Then, he got employers to pledge they would not cut wages. Since the cost of labour was then too high for the closely-shaved profit margins, businesses could not hire. Unemployment rose.
Roosevelt was a shameless politician. He attacked Hoover for spending too much money – won the presidency – then spent more. He began so many agencies and projects – from the AAA (Agriculture Adjustment Act) to the CCC (Civilian Conservation Corps) to the SSA (Social Security Act) – he practically ran out of alphabet. He also imposed wage and price controls, as well as limits to executive salaries. The result? A long, hard, on-again, off-again depression that put a quarter of the workforce out of a job. It might have lasted until the '50s had it not been for the biggest public works programme of all time – WWII.
Now the ghosts of the Great Depression haunt the Capitol, while today's Smoots and Hawleys try to come up with a new plan. They've pledged a new bail-out programme by week's end. When last we looked, world markets were turning up... like a girl expecting a kiss. They'll get a good fright; we don't doubt it.
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