Ed Driscoll

What's the Second Coming of FDR Without a Depression?


Back in late November of 2008, Time magazine, still churning out its kiddie edition, to borrow from yesterday’s Onion video, compared the newly elected, and utterly unproven Barack Obama to FDR — and you can’t have the next FDR without giving him a Depression of his own to reside over, right? The following month, Virginia Postrel spotted numerous journalists with a case of “Depression Lust,” in the immediate aftermath of their candidate’s election and reminded them, be careful what you wish for:

If anyone should fear a Depression, it should be journalists, who are already the equivalent of 1980s steelworkers. But instead, they seem positively giddy with anticipation at the prospect of a return to ’30s-style hardship–without, of course, the real hardship of the 1930s. (We’re all yuppies now.)

As CNBC’s Jeff Cox writes, Mission Accomplished, boys:

Positive gross domestic product readings and other mildly hopeful signs are masking an ugly truth: The US economy is in a 1930s-style Depression, Gluskin Sheff economist David Rosenberg said Tuesday.

Ironically, that’s not exactly the shock it’s supposed to be. As I wrote back in July:

Megan McArdle, The Atlantic’s resident in-house World’s Tallest Female Libertarian Econoblogger Who Nonetheless Voted for Obama, wrote yesterday:

Random thought of the day: what if Lord Keynes was right . . . but only in 1932?

Actually, that timeframe makes a certain amount of sense — we know Keynes wasn’t right from 1933 to 1941, when, as UCLA noted a few years ago, “FDR’s policies prolonged Depression by 7 years, UCLA economists calculate.” Or as Mark Steyn presciently noted, in late October of 2008, other nations had economic Depressions at the start of the 1930s; the US had a Great Depression, earning that added sobriquet due to its needless longevity.

And we know that Keynes’ medicine — spend ‘til a nation is even more broke than it was at the start of the Depression — wouldn’t go over well with the American people during 1932, since it wasn’t a part of Roosevelt’s platform. FDR, to listen to him, seemed most concerned with ending Prohibition, and far from promoting massive Make Work Projects, in some ways, ran to the right of Herbert Hoover.

But thanks to almost three quarters of a century worth of self-perpetuated myths, today’s liberals actually couldn’t wait for the 21st century economy to collapse before literally promising to dust-off 70-year old programs. Pennsylvania Democrat Paul Kanjorski was quoted in May of 2008 as saying:

“All we’re doing is going into the basket and saying, ‘Damn, what did they do in ‘32, what did they do in ‘34, what did they do in ‘36,’ and we’re pulling them out, dusting them off, giving them a paint job, correcting the fenders a bit, and we’re using them…To get us through the horrendous problems we may have over the next several years, we’ve got to make these old programs work, and we’ve got to be as inventive as hell.”

In May of 2008, the Dow-Jones was 2000 points higher than it is today, and unemployment was at about 5.5 percent, half of today’s national average.

At least though, most of FDR’s Keynesian programs were focused on temporarily creating jobs by building things. But that’s the paradox: pace Rep. Kanjorski, we can’t do what they did in ‘34 and ‘36. Thanks to a morass of political correctness, NIMBY “Not In My Backyard” extremism has gone BANANAS — “Build Absolutely Nothing Anywhere Near Anyone.”

In his CNBC column today, Jeff Cox wrote:

Writing in his daily briefing to investors, Rosenberg said the Great Depression also had its high points, with a series of positive GDP reports and sharp stock market gains.

But then as now, those signs of recovery were unsustainable and only provided a false sense of stability, said Rosenberg.

Rosenberg calls current economic conditions “a depression, and not just some garden-variety recession,” and notes that any good news both during the initial 1929-33 recession and the one that began in 2008 triggered “euphoric response.”

Back in December 2009, Amity Shlaes, the author of The Forgotten Man, which spent a fair amount of time discussing FDR’s 1937-1938 recession-within-the-Depression, cautioned in her Bloomberg column that a repeat of that sort of dead cat bounce was a likely possibility this year:

“Fat cats” is what President Barack Obama just called bankers. He also invited them to the White House this week.

The reason for the mixed message is that the president is cross with banks: they have refused to heed his orders to lend. The dynamic of preachy executive and elusive lenders recalls the mid-1930s, when a petulant Franklin Roosevelt gave a label to banks’ puzzling behavior: “capital strike.”

In the 1930s, the capital strike was followed by the depression of 1937-38 within the Depression. Today too, capital ponders going on strike. And without big policy changes the economy will face similar consequences.

Consider the parallels. In 2009 government seems to be spending enough for the cash to flow all around. The scope of this effort to drown the nation in money is unprecedented. In the mid-1930s Washington was also dumping dollars around in a then-unprecedented fashion. In 1936, federal outlays outpaced state and local spending for the first time with the nation not at war.

Another similarity: a government that won’t say when the spending will stop. The Obama administration is generous with timetables when it comes to foreign policy, but withholds them when it comes to domestic budgeting.

Withholding was also a feature of the mid-1930s. In a comment reminiscent of presidential adviser Lawrence Summers, Senator Robert Wagner of New York told citizens in 1935 that that the U.S. would “maintain our public efforts until private businesses take up the slack.”

A third big parallel is exceedingly low interest rates.

Flawed Assumption

What causes the strike? For one thing, White House assumptions that the banks are the same institutions that they were at the start of the economic crisis. Bear Stearns, Lehman Brothers and Countrywide Financial may be gone, but the bitterness of their experience has been internalized by commercial and investment banks alike. So they hesitate.

Observing that banks maintained what had once been considered ample reserves, 1930s monetary authorities reasoned that increasing reserve requirements on paper would have little effect: their increase was merely a de facto recognition of an accumulation that had already occurred.

The authorities forgot these bankers had been burned. The wary banks reacted by stashing away yet more cash. The result was an unforeseen tightening and less cash in the economy.

Election cycles also contribute to capital strikes. Banks today know that whatever the White House says, it has to stop pouring out the cash eventually, probably after midterms. Banks in the 1930s held onto cash because they knew Roosevelt would stop spending after the 1936 election, and he did.

House Winnings

High taxes, or the prospect of tax increases, do damage as well. In 1937, a tire company executive explained the effect of Roosevelt’s confiscatory rates upon the investor: “He will not risk financing new ventures if the government take is greater than that of the average gambling house.”

Infantilizing the private sector also makes it shut down. In the 1930s, Roosevelt, like Obama, alternated between coddling banks and companies and giving them the equivalent of a good spanking. Both can be counterproductive. The editors of Time magazine formally recognized that by printing a regular rubric over its weekly reports: “Last week the U.S. Government did the following for and to U.S. Business…”

The insistence on executive discretion is a real killer as well. Adolf Berle, Roosevelt’s assistant secretary of state, sounded for all the world like Hank Paulson or Timothy Geithner when he argued in the late 1930s for a “modern financial tool kit.” Tool kit means “let me fiddle around” and not “let us agree together on rules and abide by them, together.”

And speaking of fiddling around, even former Clinton aide turned CNN lifer Paul Begala concedes that the GOP’s John Boehner was shrewd to call for a new set of players this morning, as Elizabeth Crum tweets:

Begala (on CNN) just gave props to Boehner’s call for firings. “Very clever move.” Compared to Dems call for Rumsfeld’s head in ’06.

Oh wait, I take it all of the above back:

Interviewed on Fox News by Greta Van Sustern this evening, Rep. Debbie Wasserman-Schultz (D) told viewers that the Great Recession is over. Those were her exact words: “the recession is over.”

Whew! Well that’s a relief!

Related: “Obama war on fisheries jobs gets vacation protest.”

Related: In sharp contradistinction to all of the government-caused sturm und drang of both the 1930s and our current woes, a look back at “The Forgotten Depression of 1920.”

Related: Wasting away again in Barack Obamaville: “If California’s unemployed came together to form a state, it would be the 36th largest in America, with almost as many people as the entire state of Nevada.”