Tim Geithner; Herbert Hoover – Depression revisited

Unlike fellow Conflucian “headliner” Dakinkat (see her must-read post), I am not an economist, and I do not purport to have expertise in the field. I offer this post based on the claims of Paul Krugman and Barack Obama that the fiscal crisis facing the United States and its citizens today is more comparable to the conditions of the Great Depression than any other crisis faced since then. If that is true, no wonder I find the details of whiz-kid tax evader Tim Geithner’s newly dubbed Financial Stability Act (this is NOT the TARP redux bill just passed by the Senate) personally depressing. So, by the way, does Wall Street.

Treasury Secretary Timothy F. Geithner announced a vast new rescue plan for the financial sector. Stocks plunged following the unveiling of the program to use $1.5 trillion or more in public and private funds to bail out banks and financial institutions and thaw frozen credit markets. The plan would create a $500 billion fund to buy up toxic bank assets such as bad real estate loans and commit up to $1 trillion to reopen lending markets for consumer, student, small business, auto andcommercial loans.

The Dow Jones industrial average was down 383 points in afternoon trading. The tech-heavy Nasdaq plummeted 63 points, and the Standard & Poor’s 500-stock index dropped 43 points.

(source)

Here are the highlights of the Geithner plan, according to The New York Times:

Now, read these excerpts from an overview of the Hoover administration’s approach to the Great Depression, which set in 6 to 8 years before Franklin Delano Roosevelt was first elected.

A) “The slump in automobile sales was paralleled by the decline in the construction of new housing, causing unemployment in the building trades. Fewer suburban houses meant fewer markets for appliances, wall coverings, and other activities related to home building.”

B) “The economy was in trouble but people, dazzled by a surging stock market, ignored it.
The consumer economy was slowing as incomes skewed to the rich. In 1929, the richest 10% of families received 39% of disposal personal income while the bottom 10% only got 2%.”

C) “People seemed to be forgetting that capitalism needs to expand, that demand for housing, clothes, automobiles, stoves, and many other consumer goods generates demand in other sectors of the economy. But mass production necessitates mass consumption. Mass consumption necessitates an income distribution that allows consumers to buy. Without the appropriate income distribution, warehouses will burst at their seams and production lines will clog.”

D) “Many of the wealthy, as well as others, joined the speculative stock market sending stock prices to greater and greater without regard to company performance; In October, 1929, the bubble burst. The crash meant the tremendous loss of capital as prices declined $74 billion from 1929 to 1932 and the repatriation of much of US investment abroad.”

E) “As historians Peter N. Carroll and David W. Noble note, Hoover feared that the collapse of the large corporations would bring down the entire US capitalist system. After all, one percent of the banks held 50% of banking assets. Three corporations—Ford, Chrysler, General Motors—manufactured 85% of the automobiles sold in the US. Chain stores dominated retail sales and their difficulties had national repercussions.

Business and industry met the crisis as they had always done—they cut production, lowered wages, reduced working hours, and fired workers. Unemployment rose from 1.5 million in 1929 to 13 million in 1933, a figure which represented 25% of the labor force. Even such a high percentage hid the dimensions of the problem because it did not what percentage had been forced the part-time work. Industrial wages fell from $425 a week to $17 a week, a decline of 32%.”

F) “To help the situation, the Hoover administration sept close to a billion dollars in public works programs but he would not go further. Nor would he argue for direct relief to the unemployed and starving because he feared that doing so would corrupt them.“

G) “Hoover and the Republicans saw aid to corporations as being different. Whereas they believed that helping the individual citizen weather the Depression would corrupt him or her, aiding corporations and other business was different. To many, it appeared that the Republicans were only interested in the rich. The newly-created Reconstruction Finance Corporation aided only the large corporations.

Hoover broke precedent because the national government assumed some responsibility for what happens during an economic depression but he was not willing to go far enough. He believed that the depression was part of the normal business cycle and had been caused by international factors and not US ones. to him, ‘prosperity was just around the corner.’ The best thing for the country to do would be to wait the crisis out.”

I am in no position to know just how deeply or robustly FDR’s New Deal reforms have insulated us from a new Great Depression. But with a Nobel Laureate and the President of the United States telling me that we are in a state of disaster, I find it depressing that the Treasury Secretary’s plan sounds much more Hooverian than FDR-like.

I know the economy is not going to do an about face on a dime. I do not need Secretary Geithner or President Obama to tell me that. But with trillions of dollars going to banking corporations and relatively little aid going to those who are rapidly falling into more dire straits than they imagined possible, I cannot help but feel as so many of us did when George W. Bush whisked us into war in Iraq. In the words of author Anne Lamott: “I don’t know who on the left can lead us away from the craziness and the barbarity: I’ve very confused now.”