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Fairy Tales and History Rhymes

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Perhaps the worst insult you can hurl at a politician these days is to give him the middle name of "Hoover."

Such as George Hoover Bush and Barack Hoover Obama. 80 years later Herbert Hoover is still the standard for the "do-nothing" president in the face of economic collapse.

Like most easy comparisons, these examples lack details. That's because the names are there for the purpose of accusation, rather than enlightenment.

However, if you dig down into the individual economic policies of Hoover, Bush, and Obama, the story gets much more interesting.

As Mark Twain once said, "History doesn't repeat itself, but it does rhyme." I'm not going to try and find direct connections in this essay, just broad picture comparisons. If the reader confuses the two, then that will only mean I was justified in writing this.

Hoover the conservative

Once the stock market crashed and the economy began dumping, Hoover looked for a scapegoat, and found it in the form of Mexican-Americans.

The Mexican Repatriation ran from 1929 to 1937. Around 500,000 people were either forced, or convinced to leave America for Mexico.

Hoover, hoping to appease the restrictionists, chose the less-permanent option of virtually eliminating visas for Mexican laborers and by bolstering the Immigration Service, which had grown from a minor government operation to a force that included a border patrol of nearly 800 officers...

They raided union halls, dances, social clubs and other ethnic enclaves where people without papers might be found. Their tactics favored intimidation over legal procedure. Suspects were routinely arrested without warrants. Many were denied counsel, and their deportation 'hearings' were often conducted in the confines of a city or county jail. Frightened and ignorant of their rights, many suspects volunteered to leave rather than suffer through deportation

The problem was that 60% of them were legal American citizens. In many ways this was a precursor to the the Japanese-American Internment during WWII, but has been almost totally left out of the history books.

The federal government has still not apologized for this travesty.

Nothing like the Mexican Repatriation is currently happening, although Arizona's immigration law was a faint echo. The fact that the xenophobes are resorting to "terrorist babies" only shows how detached they are from the mainstream.

After broad congressional victories by the Democrats in the November 1930 elections, Congressional attitudes towards relief began to soften. Congress approved a bill which would make available one-half of the adjusted compensation from the Soldier's Bonus Act of 1924. Hoover vetoed the bill in February 1931.

This eventually led to the politically disastrous Bonus March of 1932.

Hoover the progressive

Until the summer of 1931 there was realistic hope that the Depression would end soon. Laissez-faire economic policies dominated all political circles, even in the Democratic Party.

There had been no federal actions to the severe economic downturns in 1873, 1893, and 1920, and still the economy had bounced back in a couple years. Outside of socialists and communists, there was no serious proposals for direct federal aid to the unemployed.

The failure of Creditanstalt in May of 1931 changed all that.

Within a few months the Austrian government was broke. This led to a run on German credit, and finally a crash in British Sterling, which led to Britain leaving the gold standard. By September of 1931 the economic crisis had jumped from Wall Street to Europe and now back to Wall Street. America was rocked by the first severe banking crisis of the Great Depression that wasn't centered in farming states.

In 1931, 2,294 banks in the U.S. failed.

And so in October 1931, Hoover set out to rescue Wall Street. How was he going to do that? By using the Federal Reserve Banks to swap out illiquid mortgage-backed securities with sound Treasuries.

Does that sound familiar? It should, because the Federal Reserve has been doing that non-stop since the spring of 2008. President Bush was just following Hoover's Plan.

On January 15, 1932, Hoover signed into law the Reconstruction Finance Corporation. This was a continuation of the Wall Street bailout. In addition to bailing out banks, mortgage companies, and insurance companies, it also bailed out railroads. It did this through a combination of loans and buying equity in banks. The RFC continued to exist until the 1950's.

Much like the 2008-2009 bailouts, Hoover's bailouts approached fixing the economy from the top-down, taking care of the wealthy and powerful first.

The RFC was derided by populist critics as "bank relief" and "a millionaire's dole"--criticisms echoed today by all those who see George W. Bush's Troubled Asset Relief Program and Obama's own Public-Private Investment Program as outrageous giveaways...Critics raised the same criticisms they would raise about Obama's bailout plans seventy-eight years later. If the banks get a bailout, why not everyone else? Were bailouts only for the rich?

Although Hoover had declared that the agency was "not created for the aid of big industries or big banks," a record of its operations revealed that most of its money had indeed gone to a very few of the country's biggest financial institutions...

The recipients of some $642 million of the RFC's loans--nearly half its total expenditures--were not revealed at all. Hoover, like Obama, had insisted on secrecy to keep the proceedings from being "politicized," but, inevitably, this fear of politicization in the end only led to more politics....

The RFC's deliberations were understood--with good reason--not as effective management but as insider dealing: common financial practice through the 1920s, but politically and morally insupportable at a time when millions of Americans were losing their jobs, their homes, and their savings, and when some were literally dying of starvation.

Just like the RFC, the 2008-2009 Wall Street bailout was plagued with corrupt, insider dealing, ethics violations, and obvious conflicts of interest. Like during the RFC, Wall Street is hoarding the bailout money, thus failing to help out the economy.

More than any other item, the failure of the RFC has been echoed into our present economic crisis. The 2008-2009 Wall Street bailout was nothing more than the RFC written large.

A month later, Hoover signed into law the first Glass-Steagall reform law. This law was aimed at expanding credit. To accomplish this, rules regarding what the Federal Reserve could accept for rediscount purposes, such as commercial paper, was expanded.

Expanding the range of acceptable assets is exactly what the Federal Reserve began doing in 2009 with its quantitative easing program. By no small coincidence, the Bank of Japan followed this route in 1999. Every time in history this method has been tried to expand credit it has failed, yet governments keep doing it.

Finally, on July 21, 1932, with the Great Depression now three years old and the wealthy taken care of, Hoover enacted the first piece of legislation that helped working America, Emergency Relief and Construction Act. The money was to be dedicated to state and local public works projects, as well as state-level relief projects, much like Obama's 2009 stimulus bill.

While a noble idea, Hoover didn't take it far enough (Obama made the same mistake 80 years later). The money was only allocated to states if the state could prove that its own resources were insufficient for legitimate relief needs. By March 1933, the money was exhausted.

By the time Franklin D. Roosevelt was inaugurated, the federal government was financing over 60 percent of all relief nationally. In the end, the $300 million in relief loans to the states was never repaid, and the federal government had permanently entered the field of public assistance.

The Hoover Dam broke ground in 1931, but Hoover could hardly take credit for it since it was Coolidge who authorized the project in 1928.

Also in July 1932, Hoover signed into law the Federal Home Loan Bank Act. This was to be Hoover's most lasting legacy.

Like Obama in 2009, Hoover felt compelled to address the foreclosure crisis sweeping America. The idea was to reduce foreclosures while encouraging home ownership and home construction by increasing the supply of money available to registered institutions in the form of home loans. Unfortunately, Hoover's efforts were overwhelmed by the size of the problem.

Much to President Hoover's great disappointment, however, the credit program was a complete failure. While 41,000 homeowners applied for FHLB loans in the first two years after its enactment, the government agency administering the program approved just three applications.

80 years later, Obama's own efforts at curbing the foreclosure crisis would fail. His efforts at boosting the housing market would also fail.

"We didn't admit it at the time, but practically the whole New Deal was extrapolated from programs that Hoover started."
-- Rexford Guy Tugwell

As the economy contracted, government spending expanded, and to pay for it, Hoover went after the rich.

Between 1930 and 1931, government spending increased from 16.4% to 21.5%. To pay for it, in 1932, Hoover raised taxes. Most Americans saw their tax rates double, with the top rate rising from 24% to 63%.

Conservatives today are having a heart attack over a 3% tax hike on the rich when Bush's tax cuts expire. Can you imagine what they would do if Obama wanted to hike the tax rate on the rich by 2.5 fold while doubling the estate tax?!?

I'll tell you what their reaction would be. It would be something like this:

During the 1932 elections, Franklin Delano Roosevelt blasted the Republican incumbent for spending and taxing too much, increasing national debt, raising tariffs and blocking trade, as well as placing millions on the dole of the government. [8] He attacked Herbert Hoover for "reckless and extravagant" spending, of thinking "that we ought to center control of everything in Washington as rapidly as possible," and of leading "the greatest spending administration in peacetime in all of history." Roosevelt's running mate, John Nance Garner, accused the Republican of "leading the country down the path of socialism."

The Results of Half-Measures

Hoover's Wall Street and credit market bailouts failed.

Late in 1932 another wave of bank failures struck. Then just before FDR took office, on February 14, 1933, the state of Michigan announced an eight-day bank holiday. This set off a wave of panic through the rest of the nation's banking system. By Inauguration Day 32 states had closed their banks and the rest of the states were using deposit restrictions. America's financial system was in complete ruin.

Obama is likely to avoid this outcome, but that doesn't mean he hasn't duplicated Hoover's mistakes.

Every instinct the president has honed, every voice he hears in Washington, every inclination of our political culture urges incrementalism, urges deliberation, if any significant change is to be brought about. The trouble is that we are at one of those rare moments in history when the radical becomes pragmatic, when deliberation and compromise foster disaster. The question is not what can be done but what must be done...

Much like Herbert Hoover, Barack Obama is a man attempting to realize a stirring new vision of his society without cutting himself free from the dogmas of the past--without accepting the inevitable conflict.

America needs a bold, broad restructuring of our economic system. We need systemic financial reforms, as opposed to the token effort Congress has given us. We need a real Pecora Commission. Not the token effort we've seen so far.

Until Washington gets serious about reforms, we will continue to lurch from crisis to crisis.

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