The New Hooverites
The time has come to review how back in 2005-2006 George W. Bush -- now increasingly perceived as another Herbert Hoover -- picked two top appointees who helped steer him towards his fateful 2008 rendezvous with a second Great Crash.
One of them, a top level financier, insured that Washington's eventual rescue policies would concentrate on trying to bail-out Wall Street while ignoring the gnawing cancer of its warped ambitions and financial malpractices. The second, a professor, misapplied dogma about how to guard against severe downturns into a disastrous attempt to refight the onset of the 1930s depression - his academic specialty. He did not understand the very different context of our own era of cyber-spatial financial recklessness and gathering global inflation.
Henry Paulson, Bush's pick as treasury secretary, was not your ordinary gray-flannel investment bank CEO. One 2006 Business Week article spotlighted the new secretary as a high-roller: "Think of Paulson as Mr. Risk. He's one of the key architects of a more daring Wall Street where securities firms are taking greater and greater chances in their pursuit of profits." That, the magazine added, "means taking on more debt...it means placing big bets on all sorts of exotic derivatives and other securities." That means stuff like collateralized debt obligations (CDOs) and credit default swaps (CDSs), innovations we now know to have spread toxicity, opacity and paralysis.
Economics professor Ben Bernanke, before replacing Alan Greenspan as Federal Reserve Board chairman in early 2006, had served almost three years as the Chairman of George W. Bush's Council of Economic Advisers. There he had been a cheerleader for Bush economic policies, including upper-bracket tax cuts, Social Security privatization, "securitization" of assets and "safe" financial derivatives. On top of which, he was an academic and theoretical specialist in monetary policy and economic depressions - a man who boasted of understanding downturns' critical preventative. The Fed should pump up the money supply or liquidity which would overcome any credit crunch. As a card-carrying monetarist, he also insisted there was no meaningful inflation during the 2005-2007 period even though global commodity price indexes had been soaring.
Thus, and without knowing it, did an inept George W. Bush assemble his two chief architects of neo-Hooverism. They would pick up where the original Disasterman, Alan Greenspan, Fed Chairman between 1987 and early 2006, had left off. Together, alas, the two would steer U.S. policy towards false pretenses, panic and economic disaster - Old Hoover outcomes re-achieved through new biases, ideology and myopia.
Wall Street's "Mr. Risk," calling the shots at Treasury, would focus the Bush administration's 2008 economic "rescue" policies not on the broad national interest but on bailing-out the "Frankenstein Fifteen" top U.S. financial institutions - the big five investment firms, the five largest commercial banks, the four mortgage biggies, and AIG, the rogue insurance giant. Along with the buccaneering hedge funds, these were the big firms that borrowed huge sums, merged grandiosely,, experimented with all "the exotic derivatives and other securities" and led the multi-trillion-dollar metastasis through which finance ballooned to take over domination of the U.S. economy by 2004 with 20-21% of the U.S. Gross Domestic product. Although in mid-2007, Paulson pretended that the emerging crisis involved no more than bad real estate lending practices, the cynical observer can assume that "Mr Risk," the arch-insider, knew what he was covering up - how deeply the malpractice and deception ran -- and on whose behalf.
If Paulson wanted to keep the spotlight off the real culprits - the Frankenstein financial and mortgage banker laboratories, with their several trillions of exotic mortgages, toxic CDOs and Las Vegas-like credit swaps - then narrow-gauge academician Bernanke at the Fed was the perfect sidekick. The economic ivory-tower theory in which Bail-out Ben had immersed himself for thirty years ignored 21st century mega-innovations and looked back seven decades to the Crash of the 1930s and how that long-ago debacle might have been prevented.
Alas, poor Ben - his economist heroes have long been Milton Friedman and the latter's wife, Anna Schwartz, who some four decades ago co-authored a landmark volume entitled A Monetary History of the United States. On October 18, in a prominent interview published by the Wall Street Journal, Anna Schwartz opined that Bernanke was simply getting Fed policy wrong. The problem does not lie with the money supply or liquidity as it did in the 1930s. It lies with all these toxic securities the Wall Street geniuses dreamed up, gorged on, and sold around the globe in huge quantities between 2003 and 2007. "They're toxic," says Ms. Schwartz, "because you cannot sell them, you don't know what they're worth, your balance sheet is not credible, and the whole market seizes up." In fact, by giving transfusions to otherwise insolvent banks, Paulson and Bernanke have prolonged the crisis: "They should not be recapitalizing firms that should be shut down...Firms that made wrong decisions should fail." That, of course, was how it worked in the old days when "creative destruction" kept capitalism on its toes. Now, of course, it's on its butt.
If Paulson and Bernanke had been willing to take a reformist blowtorch to the big fifteen and their practices and products back in late 2007 or early 2008, some six or eight might well have had to be dismantled, taken over or forced into bankruptcy or receivership, but the stock market and credit crisis of the last few months might been avoided or greatly mitigated. Instead, Paulson pretended that nothing serious was wrong because he came out of the same Wall Street ego-trip, and Bernanke could not transcend his student-of-the- 1930s academic background. "This was {his} claim to be worthy of running the Fed," says Anna Schwartz. However, Bernanke flubbed because he was fighting the last war, not the present one.
Worse still, the policies that Paulson and Bernanke did implement at such staggering cost have only begun to do their full long-term damage, which will probably come in a round of even more serious inflation. Together, the Treasury and the Fed have spent or loaned over a trillion dollars in financial-sector aid. As set out by economist Brad Setser of the Council of Foreign Relations, besides steering $950 billion into the U.S. financial system ($500 billion sent over by the Treasury), the Fed has provided still another $450 billion of dollar liquidity to European central banks to spread around on that continent. This decision by the United States to be the lender of last resort, in tandem with Washington's late September and October scare rhetoric about U.S. and world economy seizing up unless Congress passed the Paulson-Bernanke bail-out plan, has internationalized the crisis and made the U.S. dollar the pretended currency of the rescue instead of the vulnerable currency of the underlying problem. Something similar happened back in August 2007, when for 4-5 weeks a flight to "safety" and U.S. treasury debt buoyed the U.S. dollar. September and October have brought this result on an even larger scale.
Administration economists have said not to worry. This trillion won't be inflationary because that effect will be lost amid the 2008 assets deflation. This is probably more bunk from economic experts who have been right about practically nothing in the last few years. Global commodity indexes have been rising since 2003, although carefully crafted federal statistics kept that pressure from being acknowledged in the U.S. until 2008. Now the common wisdom is that declining commodity prices spell a long-term decline. The better likelihood is that inflation, still much in evidence globally, is only taking a breather, as it did circa 1971 and circa 1974 during the 1967-1980 inflation cycle. Within a matter of months, Washington's huge 2008 borrowing and soon-to-be-record trillion-dollar budget deficits will send inflation to new heights, and the current "treasuries bubble" and "U.S. dollar bubble" will pop.
Indeed, Ben Bernanke must remember from his old research that in the Spring of 1933, even after the huge assets deflation of 1929-32, new President Franklin D. Roosevelt's talk about cheap money, stimulus and reflation quickly sent commodity prices and inflation climbing. And today's rampant loan-making and deficit economics, by comparison, promise to make the FDR of 1933 look like Ebenezer Scrooge. Neo-Hooverism, in contrast to the 1929-32 version, is coming out of a new playbook.
Kevin Phillips's new book is Bad Money: Reckless Finance, Failed Politics and the Global Crisis of American Capitalism, published in April by Viking.
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As I read the author's well-researched book, Bad Money, and watch its teachings used as the analytical tools in these more jazzed-up blog columns, I am stiil waiting for the author to reveal his proposal to address the current economic crisis. His criticisms of Paulson and Bernanke may be well based, but the time for criticism is over, and the need for remedial proposals is urgent. What is your best shot at a solution?
Great article, Mr. Phillips. (Terrific book, too). I'm still dumbfounded that the credit crisis could come to Bush's attention on such short notice, and a rescue package to the tune of $700B could get jammed through on similarly short notice or supposedly the sky would fall. The more Bush agonized about how critical it was to act fast, the more I wanted to run the other way. Our "representatives" in Washington took the bait, but when you run the presses for that much money, what possible outcome can there be but inflation. I'm not fooled by this cyclical easing of commodity prices -- or strengthening dollar -- either. When they both shift into reverse, Barack Obama will make a convenient target for the blame, but I'll trace it back to the closing act of Bush's disastrous selections of Bernanke and Paulson.
The debate of inflation versus deflation deserves this supply-demand appraisal. Throwing a trillion dollars into an already internationally saturated dollar surplus creates quite a supply. When countries recognize that the dollar surplus, resulting from umprecedented borrowing to run the American government and private consumption, it is rational to predict that sooner or later there will be a run on the dollar. One need only study the history of irresponsible economic policies of other countries to imagine the result. It most certainly won't be deflation.
compare a nation that is consumer/debt based addicted to fiat currency (printed and borrowed) to that of a savings/production based nation on sound money/backed currency.
what is wealth?
http://www.globalfirepower.com/list_gold_reserves.asp
Except those other country's currencies aren't backed by gold either. China's currency certainly isn't. Until late 2005 it was pegged to the dollar. It's also crazy to think that China uses a "sound" money policy. They don't even have a central banking system and most their banking is done kind of like the wild west. China by the way has a significant real estate bubble too, and that is also bursting.
how do you think they got all of that gold?
producing, exporting, saving. their currency could have been okra.....
"The problem does not lie with the money supply or liquidity as it did in the 1930s."
the hell it doesn't. Why? because our money is paper now since the breakdown of Bretton Woods and our production has left our shores.
Bernanke sold out and did indeed get monetary supply wrong!
http://www.youtube.com/watch?v=TP_aJ7LcAAA
http://www.youtube.com/watch?v=coaI3d89kuA
A simple formula explains much, if not all, Bushie behavior since 2001. To wit: 2TMG2TF: Their Taking the Money and Giving it To Their Friends. For these guys, emergency after emergency, disaster after disaster, has been turned into opportunities to empty the treasury and make sure it stays that way for generations to come. Why should anyone view the current giveaway through any other lens?
What should really, really scare us here is this:
"Worse still, the policies that Paulson and Bernanke did implement at such staggering cost have only begun to do their full long-term damage, which will probably come in a round of even more serious inflation." The word here should be hyperinflation.
Hey you god-eating monkey, that's exactly my position. These guys have absolutely no credibility. They deceive us as a matter of policy. They lie to us when they testify in Congress.
FDR had a great word for this type: banksters!
IMO, we're being swindled out of our future by those who've stolen election after election. Doesn't look all that inept to me, looks like they've being horrifyingly successful.
They believe the cosmos is a machine, and they and their god are the master of it. Any dissent is equated with challenging the throne of Heaven. All they want to do is machine the whole planet into Plantation America, where we'll do our work and theirs, too.
But now, we see through their masks.
A great column. I've been waiting to see when or if the Treasury will actually look at the books of the banks and insurance companies they're rescuing. So far, it seems like they've been careful to keep their eyes closed while shoveling out tax payer dollars to these banks. I just don't get it.
It is *insane* to pour such a huge investment into banks and insurance companies whose very solvency is in question. Before any of these entities should be bailed out, their books should be examined and their value evaluated as if their bad assets were marked to market. Then, and only then, should the Feds bail out (for real equity) the most solvent, say, 30-40% of these banks. The others should be merged into these survivors.
I'm disgusted by the fact that Paulson is pouring money on his old buddies without doing any due dillgence to see what he's buying with our money. You can be sure that if the money were GS's, real due diligence would get done.
Kevin Phillips is not the usual 'oracle' for the Left but all you have to do is read his book, American Theocracy, and you'll see how the sorry state of USA today was charted in the hubris, military over stretch, and religious silliness of the Spanish, Dutch and English empires of centuries past. It was there for anyone to see. But who cared.
Kev is a real voice of wisdom. Regardless of what side of the aisle you perch on.
I wondered why W picked a professor to run the us economy, rather than someone who had actually been employed in running some part of the economy. I read how he focused on the depression, tried to learn from it, maybe prevent the next one. Now it's looking like that's why W picked him. Maybe he knew it was coming thanks to having deregulated the casino, got the dice rolling for his friends, inflate the market, throw in a few shell game style investments, sell off, bank profit, collapse, buy at the bottom. Yep, looks like W and friends were setting the game up, and Bernanke was there to try to save it from complete ruin once the inevitable happened.
The federal reserve board chairman doesn't "run the US economy". Bush "didn't deregulate" as that was done before W became President. Also note that the Democrats refused to allow the administration to regulate Fannie and Freddie. What bank profit are you talking about? The last I checked most banks are losing money.
One thing about the current economic melt-down that has been bothering me is this: in the 1930's, the US did not have the huge deficits that we have now - America could go into some debt and still work through it. In this situation, it just doesn't make sense to me that the Bush-Bernanke-Paulson trio can use the same tactics used during and after the Great Depression and have them work... sooner or later, America's balance sheet becomes untenable. I just can't believe that the Chinese and the Saudis are going to continue to be willing to buy American debt ad infinitum.
I've taken my money out of the markets (back in mid-September), and I'm not considering putting it back in until Barack Obama has taken over as President of the US - we need new and better leadership in this situation.
I cannot pretend to understand the details of this hierachical and cyclical failure of risk finance, but perhaps I understand something more basic: the degenerate gamblers who gravitiate toward increased risk-taking in markets and in casinos cannot back away from the game before they have lost all credit at the table, and their shirts and watches.
They will find a place to lose no matter what regulations are put in place by those who persist in believing that capitalism is a workable system if only technocrats would get the regulations right, and they will find a place and a way to lose faster than statutes can be dreamed up to constrain them. In the late 20's, the new vehicle to disaster was buying on margin, which had until recently anyway, largely been regulated into illegality. But that only caused the geniuses of gambling to pressure the politicians for the mooting of constraints, and todevelop new instruments over the next decades with which to immolate all wealth, and eventually they employed them,and now, disaster anew.
Studying how compulsive losers manage to lose no matter the odds is an intellectual exercise, but is otherwise useless, except insofar that most philosophers through history have received stipends for expounding and expanding on the virtues of the wealthy, and most economists have been employed to convince its victims that the system presently oppressing them is actually a form of freedom.
Whenever I read Kevin Phillips I think of the title to the old ENRON expose' -'The Smartest Guys in the Room.' Not that I equate Mr. Phillips with these crooks, it simply means that when it comes to the subject of economics, and all of the associated talking heads that express their opinions on such matters -when Mr. Phillips enters the scene- I am suddenly left with the realization that 'now' the smartest guy has just enter the metaphorical room... Conversely, since he is such a clear, articulate and engaging writer and scholar, I too become just a tiny bit smater myself, as a result of his talents... Thank you very much. Who says economics has to be so dull and dry? Not Kevin Phillips...
Phillips is correct. Bernacke and Paulson are fighting a war to pay off trillions of interconnected waggers and exotic debt instruments. These instruments are in financial and other private institurions all over the world. JPMorgan, has the bulk of the American innovative debt instruments totaling upwards of 70 billion, if my memory is correct. (Even the regional Fifth-Third Bank is entangled and is requesting 3 billion as starts.) Unwinding all these bets is impossible. Why? They would bankrupt our currency. As it is, Bernacke has done irreparable harm to the credibility of our currency by throwing our currency to the very villians that got us into this Empire destroyer.
Phillips is warning us that the policies of Paulson and Bernacke or breaking the bank. We are confronting inflation and depression at the same time. This is suicidal policy of an Administration that is bringing down our democratic form of government. The many millions are being cast into the shadows of history for the safety and welfare of the few.
The bailout is a stop gap to allow all the insiders to work the system and get out before it all collapses. Bush and his cronies are simply grabbing the silver and china on the way out the door.
Exactly my thinking from the get go. They're all covering or redeploying their assets and unwinding their positions even as we speak. The 800 point hike in the market today (Tue 10/28) is just "showtime."
ya, it's a big conspiracy! ssshhhh... don't tell anybody. Good post..
Mr. Phillips love your books. Over the last three weeks I have heard the economic package as a "bailout, a rescue, an investment (they backed off of this really fast) and then a recovery plan" What the hell is this package.
I call it the biggest inside Treasury HEIST in our history.
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