Bush and Hoover

In reference to the potential failure of the auto bailout bill to fail (which it did on Thursday), Dick Cheney it is reported told Senators that it could be “Herbert Hoover time” again. In fact, Cheney was wrong. It is Herbert Hoover time again. Under the Bush administration’s tenure, the government has undertaken an extensive series of measures that Hoover once called his own in the hopes of preventing calamity. Let’s go to the replay booth, courtesy of Murray Rothbard:

• Hoover repeatedly inflated credit in an attempt to provide liquidity to the system after the market fell precipitously in 1929 (as he had done during the 20s to fuel the boom in the first place).
• Under the Futures’ Trading Act, in order to counter the activity of speculators a tax of 20 cents per bushel was placed on speculative transactions including puts and calls, and bids and offers, except when made in certain specific markets when authorized by the Secretary of Agriculture. Perhaps more significantly, he also forced Richard Whitney, the head of the NYSE to agree to withhold loans for the purpose of short-selling, and later stock exchange authorities at Hoover’s urging imposed a full ban on short-selling of securities.
• Hoover held a Conference on Home Building and Home Ownership to promote the widening of home ownership and to lower interest rates on second mortgages.
  The conference resulted in a heavy increase in long-term credit at lower interest rates and aid to low-income housing. Hoover also tried to force insurance companies not to foreclose on insolvent homeowners.
• Hoover set up the National Credit Corporation, forcing strong banks to pool their money together to extend credit to weaker banks, which they would finance through Federal Reserve assistance of up to $1 billion. The banks would rediscount bank assets that the Federal Reserve couldn’t legally rediscount on their own. When this proved insufficient, Hoover set up the Reconstruction Finance Corporation to disburse Treasury funds to struggling banks, industries, agricultural and credit agencies and local governments. “For the first five months of its life, the lending activities of the RFC lay shrouded in secrecy, and only determined action by the Democratic Congress finally forced the agency to make periodic public reports,” as Murray Rothbard notes. 80% of the loans went to banks and railroads, of which 40% went to railroads because it was felt that if the railroads defaulted, the insurance companies and savings banks particularly would be stung. As well, as John T. Flynn noted, “When the R.F.C. lent money to one railroad to pay rentals to another railroad, it was in effect using public funds to pay dividends to railroad stockholders.” The RFC went into action fairly quickly, but Hoover himself complained because it took six weeks during which time securities continued to plummet in value.
• Under the Glass-Steagall Act, Hoover significantly broadened the assets eligible for rediscount and permitted the Fed to use government bonds as collateral for notes as well as commercial paper; through the FRB, the government purchased major amounts of securities.
• The government worked to weaken the rights of creditors by giving debtors more time to come up with payment before having to disburse of their assets.
• When the government imposed bank holidays, they forced national banks who could have stayed open and functioned sufficiently to close as well.

Bush’s administration has followed Hoover’s playbook to a tee. The government has pumped tons of money into the system (charts courtesy of this St. Louis Fed Report) as Hoover did, and we are now approaching critical mass at the so-called “zero bound,” where only unconventional monetary policy can be used to inflate according to the eminent Mr. Bernanke. The exchange authorities have resorted to imposing restrictions on short-selling in certain securities. The government has encouraged mortgage companies to keep people in their homes, and is devising plans to work to reduce foreclosures through a number of options. The pooling of money from the good banks to buy poor banks with the insurance of the federal government has been done in the wake of Bear Stearns and the Fed and Treasury’s brokering of the deals to merge other financial institutions. The ever-changing TARP program is essentially the modern-day RFC, even down to its secrecy. Just as in Hoover’s time, money is being allocated to certain companies deemed too interconnected to the financial system to let fail. And of course, just as back then the money has been used by banks for reasons counter to what the government had hoped. According to Mr. Bernanke, like under Hoover the Fed has continually expanded its powers to accept securities at the discount window, purchased massive amounts of securities and even resorted to purchasing stock in banks, a step beyond Hoover (which Roosevelt eventually took). The weakening of the rights of the creditors under Hoover amounted to allowing insolvent debtors to keep functioning, something underlying literally all of the bailout plans for both homeowners and corporations being proposed or already enacted. Finally, the episode of the government forcing banks to take bank holidays even if they were financially sound is reminiscent of the banks being forced to receive TARP funds today.

What is even scarier about all of this is that most of what President-elect Obama is proposing in his “New” New Deal is even more far-reaching and radical. The era of Bush and Obama I believe will look exactly like the era of Hoover and FDR. It appears we are doomed to make the very mistakes that led us to the Depression we faced nearly 80years ago, in large part due to our “laissez-faire” Mr. Bush and his administration.