Wall St: People are Asking the Wrong Question

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more: http://www.economicpopulist.org/?q=content/people-are-asking-wrong-question

People are Asking the Wrong Question
Wall Street bailout plan

All discussion about the proposed taxpayer-funded bailout of Wall Street banks is centered around the idea of, If we don't bail them out, they will fail.
It seems no one is asking a much more important question of, "Will this bailout do any good?" Or to take this one step further, "Will this bailout do more harm than good?"

We badly need to consider what history teaches us before we repeat the same mistakes all over again.

Lessons From Hoover
People like to look back on FDR's New Deal as a success story of government intervention. These people ignore two important facts: a) that Hoover repeatedly tried to save the Wall Street banks in the preceding years and failed, and b) by the time FDR became president almost every bank in America had already failed. There was almost nothing left to save.

The first thing to understand is that Hoover was an activist president in regards to the economic crisis.
Indeed, while Hoover fulminated against "socalled new deals," it was Roosevelt who accused the President of "reckless and extravagant" spending, and of thinking "that we ought to center control of everything in Washington as rapidly as possible." Roosevelt's running mate, Congressman John Nance Garner of Texas, 63, even claimed that Hoover was "leading the country down the path of socialism."

Doesn't this sound a little familiar? Doesn't this sound like the Democrats accusations against the Bush Administration? It should.

Many of the most popular New Deal programs were actually started under Hoover. For instance, the Federal Home Loan Bank Act, and the Reconstruction Finance Corporation.
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.

The best example of Hoover history repeating under the Bush Administration is the current policy of the Federal Reserve swapping treasuries for nearly worthless mortgage-backed securities.


New York Times, October 8, 1931

Real Estate Men On Hoover Plan

Skepticism as to President Hoover's plan to liquidate frozen bank assets was expressed yesterday by Charles G. Edwards, president of the Real Estate Securities Exchange. The exchange deals almost exclusively in real estate bonds, of which it is estimated that $1,500,000,000 at par value are in default throughout the country.
<...>
"President Hoover's financial plan," Joseph P. Day said in part, "is a step in the right direction towards making real estate investment more liquid. The system will make it possible for the Federal Reserve Bank to issue acceptance notes against sound real estate securities, thus stabilizing their values. Real estate mortgages are commonly regarded in banking as frozen assets. The Hoover plan seeks to take these substantial investments from the frozen asset class and give them a recognized value."

All of these things President Hoover tried, and all of these things failed to save both the real estate market and most of the Wall Street banks.
There is a cost to that failure, and that cost is wasted taxpayer money that could have been better used if it was simply directed at the working man and woman.

Lessons from Japan

The most important historical example happened very recently on the other side of the Pacific.


Recognizing that this bubble was unsustainable (resting, as it did, on unrealizable land values - the loans were ultimately secured on land holdings), the Finance Ministry sharply raised interest rates. This popped the bubble in spectacular fashion, leading to a massive crash in the stock market. It also led to a debt crisis; a large proportion of the huge debts that had been run up turned bad, which in turn led to a crisis in the banking sector, with many banks having to be bailed out by the government.