The Recession, Hoover And Bush Paradigm"

The U.S. has not endured a deep and prolonged recession in more than a quarter century — enough time for many Americans to forget what one feels like.

But unlike the last two relatively short recessions, this one could be much longer and more severe, potentially bringing with it anxiety and job losses not seen in many years.

"In thinking about recessions, people will naturally think back to the last couple" in the early 1990s and in 2001, said Paul Ashworth, senior U.S. economist at Capital Economics in Toronto. "What they should be looking back at is further."

That requires dredging up memories of the economic slides in the 1970s, when an Arab oil embargo starved the nation of energy, and the early 1980s, when unemployment and inflation soared.

The last recession — coinciding with the collapse of the tech stock bubble and the terrorist attacks of 2001 — lasted just eight months. It was known more for the slow "jobless" recovery that followed than for the depth of the downturn.

Many economists agree that the nation won't be so fortunate this time.

"I don't think we can escape damage to the real economy," former Federal Reserve Chairman Paul Volcker said this week in Singapore. "I think we almost inevitably face a considerable recession."

The Fed's current chairman, Ben Bernanke, delivered a more measured, but similarly grave assessment to economists, saying the recent financial turmoil "may well lengthen the period of weak economic performance and further increase the risks to growth."

Volcker, appointed by Carter to lead the Fed in 1979, took on inflation by sharply raising interest rates. It worked, but made life even more difficult for consumers at a time when the nation was doubtful about its economic future.

"That was the feeling at that time: hopelessness, in terms of how do we get out of this situation," said Anthony Campagna, author of "The Economy in the Reagan Years."

Said Jay Bryson, global economist at Wachovia Corp.: "I think no matter how you measure it, this coming recession will be worse than the last one."

Herbert Hoover Redux

Periodic recessions are the necessary price for the bountiful harvest of the capitalist system. People and businesses are not perfect, and supply and demand get out of whack every so often. If there is no interference from government, in time, the market will right itself back to equilibrium. Because supply temporarily exceeds demand, wages, prices, business investment must drop to restore equilibrium.

However, since Hoover’s time—ironically partly because of the monstrous economic catastrophe that he wrought—Americans expect the government to come galloping to the rescue in any economic slowdown. Somehow they expect the government to be more perfect than the admittedly imperfect market—after all, the private sector has gone askew. Yet because the government is gambling with other people’s money and private businesses are using their own, markets, rather than bureaucrats, usually make better economic decisions.

Presidents, legislatures, and the public in the 19th century recognized these facts and did not expect the government to interfere in the economy in vain attempts to correct economic problems. They knew that the market would self-correct as it always had.

Today, Americans routinely expect politicians to make the economy’s ailments better and bail out businesses and citizens for bad economic decisions—an expectation created by Woodrow Wilson’s massive government meddling in the U.S. economy during World War I and Hoover’s and his successor Franklin Delano Roosevelt’s (FDR’s) interventions later on. Thus, in that spirit, the conventional wisdom nowadays is that too little was done by Hoover about the economic downturn until FDR saved the day with massive government intervention.

In fact, Hoover did too much about the recession and things went downhill from there. Instead of letting wages, prices, and investment fall to restore equilibrium in the market, Hoover pushed businesses to keep wages and investment high, despite falling demand for their products. He created public works programs that also kept wages artificially high and signed a draconian hike in tariffs that declared economic warfare on the world. But most important, Hoover flooded the market with credit even though excessive increases in the money supply—mostly during predecessor Calvin Coolidge’s one-and-a-half terms—had created conditions in which businesses had been tricked into a sense of false prosperity and thus had undertaken excessive investment. The reduction of that bad investment had led to the recession in the first place. Now Hoover was trying to artificially pump up the economy, which made the inevitable economic malaise even more dire. FDR then came into office and continued Hoover’s government intervention into the marketplace on a massive scale. The market was never allowed to right itself until resources were returned from the public to the private sector after World War II ended; only then was prosperity restored.

The same mistake by Hoover is being repeated now. Initially, Alan Greenspan followed the laudable tight monetary policies of Paul Volcker—appointed by Jimmy Carter and responsible for the prosperity of the Reagan years after an initial recession—and assisted in the prosperity of the Clinton years. Toward the end of his tenure at the Federal Reserve, however, Greenspan began to sow the seeds of the current crisis by providing more cash to the economy. Ben Bernanke has continued this ill-advised monetary expansion. In an economy already flush with cash, the government is worried that people and businesses won’t get enough credit to spend the economy out of its doldrums; it is now socializing or bailing out the financial institutions that made bad loans and is buying up bad debt itself to pump up the credit markets. This massive artificial infusion of cash into the economy—at the possible staggering cost of $2.3 trillion (approximately the budget of the gargantuan federal government for an entire year)—provides welfare to the wealthy and makes it that much harder for the market to right itself. In other words, government action may very well have turned a sluggish economy into a catastrophic tailspin, ala Hoover and FDR.

But at this point, the deed is done and the market will just have to struggle to right itself. We can now just refer to Washington as Hooverville. Unfortunately, U.S. government intervention into the market has shamed other countries into bailing out their own financial sectors, probably spreading this cataclysm to other nations. But governments should avoid further bailouts or we’ll end up in a depression that could last years.

     One would think that Ben Bernanke, the economist and Great Depression scholar, would know how to avoid another Great Depression. Certainly Fed Chairman Ben Bernanke and his predecessor, Alan Greenspan, would have learned from the mistakes of President Herbert Hoover and Franklin Roosevelt in dealing with the recession in their day, a recession their fiscal policies turned into the Great Depression. Today The Bush Administration's fiscal policies are creating another Great Depression, as I see it. Instead of letting the stock market and the housing crisis "bottom out" so that that "bearish" investors, lenders and home buyers feel confident to do business again, the Bush Administration is determined to keep the artificial and inflated house and stock prices at their present level by flooding the market with easy credit and taxpayers dollars to Wall Street. Barack Obama and John McCain, can't you see the recession, Hoover and Bush paradigm? Ralph Nader can!

tags: bush  wall street bailout  politics  business  capitalism  free market  takebackamerica  ralph nader  us recession  great depression  

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