Herbert Hoover Copycats, Japan's 'Lost Decade' Copycats

The frustration of Obama's natural Hooverism is excruciating. I realize why Obama and Summers are incapable of acting on the glaring lessons of economic history but still, if we don't do so it will be so painful for nearly all of us. Very soon, for you, for your aging mom and dad.

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Well, it won't be painful for the elite, not for Michelle, Barack, not for Penny Pritzker or Pete Peterson, but for all of us who needed -- and I mean needed -- their soon-to-be shredded Social Security (yup, that's the plan) and Medicare/Medicaid (yup that's the plan too: "Obama said in January that the [fiscal deform] summit would have a special focus on Social Security, Medicare and Medicaid.").

And all for what? To bail out the biggest, most irresponsible banks. Read Ismael Hossein-Zadeh's column and weep again:

Faced with the financial meltdown of the Great Depression, the Hoover administration created the Reconstruction Finance Corporation that poured taxpayers' money into the coffers of the influential Wall Street banks in an effort to save them from bankruptcy. Like today's Bush/Obama administrations, the Hoover administration used the "too-big-to-fail" scare tactic in order to justify the costly looting of the national treasury. All it did, however, was to simply postpone the day of reckoning: almost all of the banks failed after nearly three years of extremely costly bailouts schemes.

In a similar fashion, when in the mid- to late-1990s major banks in Japan faced huge losses following the bursting of the real estate and loan-pushing bubble in that country, the Japanese government embarked on a costly rescue plan of the troubled banks in the hope of "creating liquidity" and "revitalizing credit markets." The results of the bailout plan have likewise been disastrous, a disaster that has come to be known as "Japan's lost decade."

Despite these painful and costly experiences, the Bush/Obama administrations (along with the U.S. Congress) are following similarly ruinous solutions that are just as doomed to fail. This is not because these administrations' economic policy makers are unaware of the failed policies of the past. It is rather because they too function under the influence of the same powerful special interests that doomed the bailout policies of the Hoover and Japanese governments: the potent banking interests.

Hossein-Zadeh goes on to say that the solutions to the mortgage and financial crises are primarily, at this point, political. We do not need to spend any more money bailing out 'failed except for govt hand outs' banks. Everything we've spent on that so far has been a waste, throwing money down the fokin' terlet. We need more stimulus, of course, much more, but Obama has 'moved on' from that.

The way to solve the mortgage/foreclosure crisis is by forcing the mortgage holders, as Dean Baker suggests, to allow foreclosed 'tenants' to stay as long-term renters at some percentage (half? market-rate?) of the previous monthly mortgage payments. We can also help in this direction by reversing the recent 'creditor is god' bankruptcy bill. These will cost NUTHING! Instead, Bama's solution is primarily a mortgage banker relief plan? my. god. It is happening as bad as I thought it might.

By the way, on Social Security, Obama needs to do emphatically the opposite of scaring people with Social Security cutbacks. Obama's big impending fiscal deform conference featuring Peterson will in fact cut consumption by increasing fear of Social Security slashing (bold added):

Stimulus II: Reaffirm Support for Social Security
By Dean Baker
February 16, 2009

The stimulus bill approved by Congress last week was a very good first step toward slowing the economy's decline, but it clearly is not large enough to accomplish the job. The economy will be seeing a loss of close to $2.6 trillion in demand over this year and next due to the collapse of housing and commercial real estate bubbles.

To counteract this collapse, Congress gave President Obama just over $700 billion in real stimulus. . . .

However, there is one step that President Obama can take to boost the economy without going through Congress: he can reaffirm his support for Social Security and assure the baby boomers nearing retirement that he will not allow their benefits to be cut. If this huge cohort in their late 40s, 50s, and early 60s knows that they can count on getting their promised benefits, they will feel more comfortable spending and supporting the economy at a time when it badly needs a boost.

The impact of Social Security on boosting consumption has long been touted by economists, most importantly Harvard Professor Martin Feldstein, who had been Ronald Reagan's chief economist and is now an advisor to President Obama. . . .

Feldstein claimed that workers spent more money during their working years than they would have otherwise because they expected to receive Social Security benefits when they retired. Therefore they had less need to save for retirement.

However, many workers may not be expecting to receive their Social Security benefits because there has been a concerted effort over the last quarter century to undermine confidence in the program and to cut the level of benefits. . . .

Workers are likely to be especially fearful about the prospects of getting their Social Security benefits now due to an all out assault on the program financed by billionaire banker Peter Peterson. . . .

Wake up Obama! Tell the big banks and Pete Peterson to f&*#k off!

Tags: banks, Barack Obama, economic crisis, Pete Peterson, Social Security (all tags)

Comments

12 Comments

What's the significant difference between this

diary, and adlefts?

http://www.mydd.com/story/2009/2/17/1737 50/004

by WashStateBlue 2009-02-20 01:47PM | 0 recs
I'm the adleft diary answer man?

by fairleft 2009-02-20 02:20PM | 0 recs
Re: I'm the adleft diary answer man?

No, but are you doing anything but yelling LOUDER?

We had this conversation in detail on that thread?

All I can see that is new is, some crazied idea the Obama=Hoover....

by WashStateBlue 2009-02-20 02:26PM | 0 recs
I don't think Ismael Hossein-Zadeh is crazy.

by fairleft 2009-02-20 03:15PM | 0 recs
Re: Herbert Hoover Copycats, Japan's 'Lost Decade'

We do know that RFC did do some good and that FDR kept the agency. The reason their were problems was that some getting bailouts were for political consideration not financial ones.

Also:

Starting in 1933, Franklin Delano Roosevelt kept the agency, increased the funding, streamlined the bureaucracy, and used it to help restore business prosperity, especially in banking and railroads. He appointed Texas banker Jesse Jones as head, and Jones turned RFC into an empire with loans made in every state. (Olson 1988)

Sorry just not seeing the Hoover equivalence. Even Krugman, no fan has gone that far.

by jsfox 2009-02-20 02:01PM | 0 recs
Re: Herbert Hoover Copycats, Japan's 'Lost Decade'

Link for blockquote?

by fairleft 2009-02-20 02:21PM | 0 recs
Re: Herbert Hoover Copycats, Japan's 'Lost Decade'

http://en.wikipedia.org/wiki/Reconstruct ion_Finance_Corporation

From: Olson, James S. Saving Capitalism: The Reconstruction Finance Corporation and the New Deal, 1933-1940. Princeton U. Press, 1988. 246 pp

by jsfox 2009-02-20 02:37PM | 0 recs
I don't think you disagree with this blockquote:

. . . the Hoover administration created the Reconstruction Finance Corporation that poured taxpayers' money into the coffers of the influential Wall Street banks in an effort to save them from bankruptcy. Like today's Bush/Obama administrations, the Hoover administration used the "too-big-to-fail" scare tactic in order to justify the costly looting of the national treasury. All it did, however, was to simply postpone the day of reckoning: almost all of the banks failed after nearly three years of extremely costly bailouts schemes.

The following fleshes out the vast differences between Roosevelt's and Hoover's RFC:

Hoover was wary of any sort of government intervention in the marketplace. He was slow to propose the RFC because he hoped bankers could solve their own problem, and he never stopped viewing it as a temporary agency. Hoover's chairmen (Eugene Meyer and Atlee Pomerene) insisted on an overly conservative set of guidelines. The RFC's loans carried high interest rates (they did not want to compete with private lenders), and its collateral requirements were extremely rigid. Moreover, RFC-funded public works projects had to pay for themselves (hydroelectric plants or toll bridges, for example). According to Hoover and his advisers, the primary purpose of the RFC was to encourage banks to start making loans again so the private sector could initiate its own recovery. It lent almost $2 billion in its first year, which was enough to serve the immediate goal of delaying a banking catastrophe, but the money did not inspire the expected general economic upturn.

In February 1933 the banking system collapsed again. President Franklin Roosevelt, inaugurated in March, had none of Hoover's reservations about state capitalism. Roosevelt immediately declared a banking holiday and passed the Emergency Banking Relief Act, which empowered the RFC to oversee bank reorganizations and invest directly in struggling financial institutions through preferred stock purchases. President Roosevelt and RFC chairman Jesse Jones continually enlarged and modified the RFC's mission to meet specific needs, and the RFC played a vital role in the evolution of the New Deal. The federal Emergency Relief Administration was modeled on the RFC state grant program, and the Public Works Administration was spun off from its public works division. The RFC also helped to finance many New Deal agencies because its semi-independent status allowed President Roosevelt to work around Congress and to work quickly. The RFC made loans to the Home Owners' Loan Corporation ($200 million), the Farm Credit Administration ($40 million), and the Works Progress Administration ($1 billion). Even greatly expanded, however, the Depression-era RFC ultimately failed in its Hoover-conceived mission of reinvigorating private investment.

http://www.answers.com/topic/reconstruct ion-finance-corporation

It appears that Hossein-Zadeh is correct and Hoover's loans to banks were ineffective perhaps because the banks were already too far gone to be saved. I'll go with his take.

by fairleft 2009-02-20 04:11PM | 0 recs
Re: Herbert Hoover Copycats, Japan's 'Lost Decade'

I do disagree completely. One because all the banks did not fail in fact initially the RFC saved a number of banks.

RFC initially succeeded in reducing bank failures, but the publication of the names of the recipients of loans beginning in August 1932 (at the demand of Congress) significantly reduced the effectiveness of its loans to banks because it appeared that political considerations had motivated certain loans. Partisan politics thwarted the RFC's efforts, though in 1932 monetary conditions improved because the RFC slowed the decline in the money supply.

What he has done is look around not at what else was going on. Was it the RFC that caused the second collapse of the banks, which the RFC had stemmed or was it congress's demands or was the politicization of the loans? Also what Hossein fails to mention, at least in your quote, is that the reason FDR called a bank holiday is that there was no FDIC to insure deposits.  Hence the run on the banks. He called the holiday to stop folks from getting the money and breaking the banks.

So basically he has left critical facts out to reach a conclusion to prove his thesis. Somewhat intellectually dishonest. And you like his thesis because it fits your mind set.  I would not  call this a way to reach an informed an opinion.

Now all that said Hoover was not the right guy to handle this crisis in the long run, with that I completely agree. What he failed at was not the banks, but figuring out what to do about job losses. He was loath to spend government money on job creation.  Obama acting like Hoover not even close.

by jsfox 2009-02-20 05:20PM | 0 recs
Re: Herbert Hoover Copycats, Japan's 'Lost Decade'

You seem not to know and have a lot questions and conjectures about what was going on in the early 1930s, yet you confidently say you "disagree completely" with the Hossein-Zadeh statement about Hoover and describe him as intellectually dishonest. Humility? First to clear up some misreading, Hossein-Zadeh said "almost all the banks failed" not "all the banks failed." He doesn't talk about them failing "initially" but states that they failed after three years of costly bailouts. Also, the quote is a strong criticism of the bank bailout actions of Hoover, which happen to be quite similar in critically important ways to the actions of Bush/Obama. The quote is of course not about the actions of FDR at all. I've placed below a couple more extended quotes that point out the immense differences between the Hoover RFC and FDR's RFC. Which is the whole point; I'd love to see Obama move us back to a heavily regulated, FDRish financial system. I'd love to see the U.S. buy voting stock in banking corporations. Our nation needs an FDR response to the financial sector crisis. It is getting a modernized on steroids Hoover reaction. Still.

Eric Rauchway:

Indeed, under Roosevelt the RFC did play an important role in saving the American financial system. But under Hoover it did not, as became clear by the summer of 1932. In its first six months of operation, the RFC lent more than $800 million to banks and other credit-granting institutions. Yet the financial crisis persisted: Banks still held their reserves and lent money unwillingly, and public confidence remained shaky and could easily spark bank runs.
The RFC's failure under Hoover and success under Roosevelt is due largely to Hoover's unwillingness to launch a New Deal even when Congress might well have presented him the means. At first, the RFC only lent money, leaving distressed banks with further obligations. Had it bought stock, the RFC would instead have put the banks a bit farther from disaster. But even after this problem became clear, Hoover did not want the RFC to buy bank stock -- that was socialism. Only with the Emergency Banking Act of 1933, suggested to Congress by Roosevelt and passed within hours, could the RFC buy bank equity. Over the next year, the RFC bought more than a billion dollars of bank stock -- an amount equal to around a third of the capital invested in U.S. banks.
But even before the RFC put the U.S. government's money behind the banks, Roosevelt restored public confidence by certifying the trustworthiness of American financiers by closing, auditing, and then reopening the great majority of the nation's banks -- attracting hundreds of millions of deposits back into the system. As with all measures that exerted new federal authority, Hoover balked at taking this step. But even had he been willing to do it, it's not certain that the public would have trusted him.
Given great power, Hoover failed to show great responsibility, using federal funds for people who seemed to be his friends and cronies, rather than for the public good. This habit appeared most evident in June of 1932, when RFC head Charles Dawes resigned to take over the Central Republic Bank and Trust of Chicago, and shortly afterward announced that he would receive from RFC a loan of $90 million.
Congressman Fiorello La Guardia said the obvious thing loudly and plainly: "He resigned with the idea of borrowing the money." Even if it were not so, it did not look good; President Hoover took a personal interest in the bailout, telling officials, "Save that bank!" Dawes then bargained RFC up from its initial offer to a bigger loan.

http://www.prospect.org/cs/articles?arti cle=can_we_have_a_new_deal_without_the_n ew_dealers

Thom Hartman:

But the Republican Bush Administration is currently suggesting that we borrow$700 billion (or more) from China and Saudi Arabia and other countries and investors, add that to our national debt, and repay it with interest (making the actual cost over the next 20 years over $1.4 trillion). This is what Republican Herbert Hoover tried in 1931 when he first created the Reconstruction Finance Corporation (later totally reinvented by FDR) to bail out the banks in 1931. Hoover's RFC bailed out the bankers, paid off huge salaries in the banking and investment world, bought him a few months (maybe that's the real goal of the Bush/McCain Republicans now - just hold things together until after the elections), but ultimately led to the failure within two years of virtually all the banks in the United States. The bailout failed.
. . .  After Hoover's 1931 bailout of the banks failed, FDR did a cold reboot of the entire system, putting into place strong rules to prevent speculative abuse. And he doubled the STET tax,both producing revenue that more than funded the Securities and Exchange Commission and further prevented a repeat of the speculative bubble of the 1920s that led directly to the Republican Great Depression.

http://rightdemocrat.blogspot.com/2008/0 9/thom-hartmann-how-wall-street-can-bail .html

by fairleft 2009-02-21 06:37PM | 0 recs
From what I've read

letting Lehman fail almost caused Armageddon:

http://www.economist.com/finance/display story.cfm?story_id=12342689&fsrc=rss

http://zerohedge.blogspot.com/2009/02/ho w-world-almost-came-to-end-at-2pm-on.htm l

Without disputing Hossein-Zadeh's thesis on the relative ineffectiveness of bailouts, he has called Obama's characterizations "scare tactics". I see strong evidence that Obama's predictions are fairly reasonable. Do you have any arguments supporting the feasibility of letting our major banks fail?

by Neef 2009-02-21 08:11PM | 0 recs
Re: From what I've read

They should be bought by the government. We could have bought them several times over with the money we've spent bailing them out.

by fairleft 2009-02-21 08:15PM | 0 recs

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