To Bow or Not to Bow to Wall Street
Comes now James K. Galbraith’s “No Return to Normal,” which might well be the most important primer for understanding how this nation should and should not be responding to the world economic crisis. Suffice it to say that Professor Galbraith—he holds the Lloyd M. Bentsen, Jr. Chair in Government at the University of Texas at Austin—is largely in agreement with the, by now, well-known views of Nobel economics prize laureate and New York Times columnist Paul Krugman. Both see the crisis as larger and more systemic—and in need of a vastly larger and more systematic response on the part of government (Think: New Deal II)—than is remotely suggested by anything Treasury Secretary Timothy Geithner has said in public so far. Indeed, judged by Galbraith’s really quite shocking reading of affairs, the current situation—not to say the greater, impending crisis—seems to be beyond the capacity of Geithner and his fellow Rubinites’ understanding.
On the one hand the Rubinites—and, apparently, Federal Reserve Chairman Bernanke—believe the trough of the “recession,” as they still deem it, could be forded by the end of 2009. Geithner, in particular, seems to think that if only we can bail out the banks by ridding them of their toxic waste, we can right the system. On the other hand, Galbraith—and Krugman as well—see this as an attempt to bail out the bankers themselves, while stiffing the public with billions—if not trillions—in obligations that will never remotely be worth what we have paid.
Meantime, it is as though, faced with a very long, hard and demanding swim up-current, we merely tread water, praying for some deus ex machina to suddenly appear and save us. This, I fear, is at the heart of the Geithner way.
Galbraith’s vision is frightening in its candor, all the more so since it suggests that the administration is in the gravest possible danger of being seen as the lapdog of Wall Street.
It does not have to be this way.
As I reminded readers in my Saturday post, Franklin D. Roosevelt did not come into office with the New Deal in hand. He was himself considered to be fairly conservative—a Hudson Valley aristocrat—and some of his early-day advisors were surely conservative. But neither was he unbending in his view of how to respond to the Depression. Roosevelt was, for better or worse, one of the most flexible of politicians. And he had the good sense to surround himself with clever White House aides like Harry Hopkins and a handful of very strong cabinet members, among them Harold Ickes, beginning at the Public Works Administration (the celebrated New Deal “alphabet soup” agency known as the WPA) and then at Interior, and Frances Perkins, the first female cabinet secretary, at Labor.
When Roosevelt’s initial choice for Treasury Secretary (a Republican) proved unsympathetic to the New Deal, ill health soon helped shepherd him off the cabinet. His replacement, Henry Morgenthau, lasted successfully into the Truman administration. In contrast, the conservative Texas banker-businessman Jesse Jones found himself seduced by the Roosevelt charm and, no doubt too, by proximity to power. Jones, despite his innate conservatism, presided ably over the vital Reconstruction Finance Corporation (RFC) throughout the Depression.
It helped that the Roosevelt administration had a fairly clear notion as to what the problems were and how they had arisen. Not so, apparently, the current administration.
President Obama seems determined not to “look backwards,” whether it be into the murky depths of the Terror Machinery of the Cheney years or into the origins of the current economic crisis, even though most of us are convinced that such an examination would unveil criminality of the first order in both cases. No, no: Better not to see. Better not to prosecute. Just get on with it.
Roosevelt had no such serious qualms, and even as the first New Deal Congress churned out reams of progressive legislation, it also did not fail to look backwards. Indeed, as Ron Chernow has detailed in his House of Morgan, the country had been transfixed during the last year of the Hoover administration by the so-called “Pecora Committee” hearings into how the Wall Street barons of the Twenties—not least among them one of the predecessors to today’s J.P. Morgan Chase, J.P. Morgan & Co.—had manipulated the markets.
But we forget that in 1893, another Democratic president, facing another grave economic crisis, behaved differently. That was President Grover Cleveland. Like Roosevelt and like Obama, Cleveland in effect inherited an economic crisis followed by a severe recession. When the Panic of 1893 struck and a depression followed, the former Buffalo mayor, New York governor and conservative Democratic president now into his non-consecutive second term (1893-1897) turned to Wall Street for counsel.
The voices on the Street advised Cleveland to hew hard to the gold standard, a move reminiscent of the later Hoover Days. In the end, Cleveland convinced a handful of Democrats to join with the Republicans to repeal free coinage of silver later that year.
The plan failed miserably. By 1895, the Treasury was virtually out of gold, and Cleveland turned supplicant to the Morgan forces. With no Federal Reserve in existence, Cleveland was forced to go hat in hand to J. Pierpont Morgan. The crusty banker, in turn, formed a private Wall Street syndicate that lent the Treasury $65 million in gold (or approximately $2 billion in today’s dollars). The terms of the loan—half of which came from European sources—soured the agrarian, liberal wing of the Democratic party on Cleveland and led to the nomination of William Jennings Bryan as the party’s 1896 candidate for president.
The Republicans, in turn, nominated for president the truly conservative Ohio governor and former Congressman William McKinley, whose campaign was bankrolled by Big Business and orchestrated by the plutocratic string-puller Mark Hanna. Like Warren Harding’s 1920 campaign and much like George W. Bush’s 2000 campaign, McKinley ran from his front porch, doling out business-friendly bromides. No wonder the pasty-faced McKinley and his oily campaign manager Hanna served as role models for Karl Rove.
But for an assassin’s bullet, it’s hard to imagine that there would ever have been a President Theodore Roosevelt—“that damned cowboy,” Hanna called him, the accidental last liberal Republican president—for McKinley was the emblem of Social Darwinism triumphant, the political face of the Gilded Age.
And thus it was that after Cleveland’s second term ended in 1897, the Democrats—tarred on the one hand by their conservative president’s response to the Panic and on the other by the Free Silver platform of Bryan—did not occupy the White House until 1913 and the coming of Woodrow Wilson.
Sixteen years is a long time in the wilderness.
Is this the historical analogy we really want to replicate?