Thinking about Coolidge and the Depression leads me to Obama thoughts

calvin-coolidgeI don’t know how long the sale will last, but if you go to Amazon now, you can get Amity Shlaes’s Calvin Coolidge biography for only $1.99. Considering what a good writer and thinker Shlaes is, I immediately acted on that deal. I’m heading on a trip soon, so it will be one of my travel reads.

Although I haven’t yet read the Coolidge book, thinking about the book got me thinking about what led to the crash in 1929. Here’s what I think I know, and I would greatly appreciate any corrections all of you can offer to bring my thoughts in line with the actual facts. I’m not in a position to check my facts tonight because I’m working on a legal brief that will keep me busy for a while. By the time I can check my facts, I’ll be in the flurry of preparing for my trip (which you will hear about as I travel).

Beginning with the 1920s, when WWI was in the rear view mirror, the Spanish Influenza had burned itself out, and America was gleefully catapulting itself into the Modern Age, the American economy began to rock and roll. There were mini-recessions, there was the disaster that was the Dust Bowl, and there were Red scares, but on the economy generally roared throughout the 1920s.  I attribute part of this economic growth to Calvin Coolidge’s philosophy, which was that it was the government’s job to get out of the way. Low taxes, few regulations, and a belief in American enterprise were the name of the game.

As the stock market rose, though, what also became the name of the game was people buying stocks on credit. In essence, they borrowed money to buy the stocks, with the only security being the value of the stocks themselves. (I’m not 100% sure about this fact, so please correct me if I err.)

What formed was a bubble, although it was a bubble floating along the top of a genuinely strong economy. With so much credit floating the stock market, it was inevitable that the market would crash. Left alone, the market probably would have adjusted itself quickly enough. Two things happened, though:  The first was Hoover’s inept meddling to “correct” the problem and the second was the collapse of the banking system. Before I get to Hoover’s meddling, with presages Roosevelt’s even worse meddling, I want to talk about the banking collapse.

It was the collapse that was the real economic disaster, because that wiped out everyone’s money, not just the money of those flocking to the market bubble. And that collapse, although you may not know it, didn’t happen because of bubbles or meddling or market forces. It happened because of antisemitism. Here’s how Milton Friedman describes the events that led to the suddenly collapse of the American banking system:

The critical date is December 11, 1930, when the Bank of United States closed its doors. It was the largest commercial bank that had ever failed up to that time in U.S. history. In addition, although it was an ordinary commercial bank, its name led many at home and abroad to regard it as an official bank. Its failure was therefore a particularly serious blow to confidence.

It was something of an accident that the Bank of United States played such a key role. Given the decentralized structure of the U.S. banking system plus the policy that the Federal Reserve System was following of letting the money stock decline and not responding vigorously to bank failures, the stream of minor failures would sooner or later have produced runs on other major banks. If the Bank of United States had not failed when it did, the failure of another major bank would have been the pebble that started the avalanche. It was also an accident that the Bank of United States itself failed. It was a sound bank. Though liquidated during the worst years of the depression, it ended up paying off depositors 83.5 cents on the dollar. There is little doubt that if it had been able to weather the immediate crisis, no depositor would have lost a cent.

When rumors started to spread about the Bank of United States, the New York State Superintendent of Banks, the Federal Reserve Bank of New York, and the New York Clearing House Association of Banks tried to devise plans to save the bank, through providing a guarantee fund or merging it with other banks. This had been the standard pattern in earlier panics. Until two days before the bank closed, these efforts seemed assured of success.

The plan failed, however, primarily because of the particular character of the Bank of United States plus the prejudices of the banking community. The name itself, because it appealed to immigrants, was resented by other banks. Far more important, the bank was owned and managed by Jews and served mostly the Jewish community. It was one of a handful of Jewish-owned banks in an industry that, more than almost any other, has been the preserve of the well-born and well-placed. By no accident, the planned rescue involved merging the Bank of United States with the only other major bank in New York City that was largely owned and run by Jews, plus two much smaller Jewish-owned banks.

The plan failed because the New York Clearing House at the last moment withdrew from the proposed arrangement— purportedly in large part because of the anti-Semitism of some of the leading members of the banking community. At the final meeting of the bankers, Joseph A. Broderick, then the New York State Superintendent of Banks, tried but failed to get them to go along. “I said,” he later testified at a court trial,

it [the Bank of United States] had thousands of borrowers, that it financed small merchants, especially Jewish merchants, and that its closing might and probably would result in widespread bankruptcy among those it served. I warned that its closing would result in the closing of at least 10 other banks in the city and that it might even affect the savings banks. The influence of the closing might even extend outside the city, I told them.

it [the Bank of United States] had thousands of borrowers, that it financed small merchants, especially Jewish merchants, and that its closing might and probably would result in widespread bankruptcy among those it served. I warned that its closing would result in the closing of at least 10 other banks in the city and that it might even affect the savings banks. The influence of the closing might even extend outside the city, I told them.

I asked them if their decision to drop the plan was still final. They told me it was. Then I warned them that they were making the most colossal mistake in the banking history of New York. [fn. omitted.]

The closing of the Bank of United States was tragic for its owners and depositors. Two of the owners were tried, convicted, and served prison sentences for what everybody agreed were technical infractions of the law. The depositors had even that part of their funds that they finally recovered tied up for years. For the country as a whole the effects were more far-reaching. Depositors all over the country, frightened about the safety of their deposits, added to the sporadic runs that had started earlier. Banks failed by the droves— 352 banks in the month of December 1930 alone.

(Friedman, Milton; Friedman, Rose : Free to Choose: A Personal Statement (pp. 80-92).)

That was a digression that I couldn’t resist including here because it was so fascinating. Now let me get back to Hoover’s interference in the market after the crash.

In her better-known book, The Forgotten Man, Shlaes compellingly argues that it wasn’t the crash itself that drove the Great Depression — it was Hoover’s Progressive-style attempts to manipulate the marketplace after the crash. Had he allowed the market to correct itself naturally, there would most certainly have been losers, especially those who bought stocks on credit, but on the whole the market would have stabilized and returned to a growth pattern.

What Hoover did, though, was nothing compared to Roosevelt’s playing with the market. Essentially, Roosevelt turned managing the market over to the government. Thanks to government fiddling, by 1937 the Depression was at its worst point ever. Despite Progressive shilling for Roosevelt and his New Deal, things were going from worse to worse.

The only thing that saved the American economy was WWII, which got its engine going again.  After the war, even though the government was still meddling, America had the great advantage of being the last man standing. Europe’s infrastructure was destroyed and the Soviet Union’s economic successes were fantasies.

In sum:  People buying stocks on credit with the stocks being the only security for the loan, the marketplace had an inevitable adjustment, and then government meddling worsened the situation rather than righting it.

Based upon my version of the facts (and I readily admit I may be completely wrong), doesn’t it seem as if events in the 1920s and 1930s foreshadowed the housing collapse in 2007/2008 and the subsequent Obama economy?  In the years leading up to 2008, instead of using credit to buy stocks, with the only security being the stocks themselves, people were buying houses without having any equity of their own. Instead, the banks were funding the entire purchase price, with the only security being the house itself, and with the borrowers having no other skin in the game.

When, as is inevitable with bubbles, the housing market collapsed, the Bush government did what Hoover had done:  It rushed in and starting playing with the marketplace. Long after Bush’s initial acts stemmed the bleeding, the Obama administration was still handing out hundreds of millions of taxpayer dollars that sucked more money out of the marketplace. The beneficiaries weren’t Americans. They were government cronies, who created a small number of jobs in exchange for hundreds of millions of taxpayer dollars.

Once the first panic subsided, the Obama government did what the Roosevelt government did:  It went to work creating myriad laws and regulations to manipulate the economy. These had a minimal effect when it came to protecting consumers, but they did a fantastic job squashing economic growth.

So it is that, for the past eight years, our economy has been utterly stagnant, as was true for the eight years after the 1929 crash. The only difference this time around is that, thanks to the 1929 crash, we have more welfare systems in place, so we didn’t get the bread lines and the Hoover-villes. That prevented Americans from appreciating just how closely our experience has paralleled the 30s. (It’s ironic that another parallel to the 1930s is the rising tide of truly scary antisemitism in Europe, with the added fillip that this time the American president is piling on, trying to destroy, Israel, which is the only place of refuge for the Jews on the receiving end of Europe’s second wave of apocalyptic antisemitism.)

If my facts are correct and if the analogy were precise, the only thing that will save us this time, as it did last time, is war. I hope it doesn’t come to that.

Indeed, I think that we’ll take a different path because we’re not getting another four years of the Obama economy. Back in the 1930s, with the Progressive press cheer-leading Roosevelt, the American people, after eight years of Roosevelt’s economic disasters, voted themselves four more years. This time around, thanks to Trump’s ingenious campaign, to Hillary’s awfulness, and to the alternative media, we’re poised to take the economy in an entirely different direction.

I do believe that ‘Trump’s economic policies will save us. And what will also save us, as we watch Europe breaking down before our eyes, both socially and economically, is that, as was true after WWII, we’ll be the last man standing. And yes, I know we still have to reckon with China, but China has its own market manipulation. I therefore suspect that it will have a crash of its own within the next few years, and you can bet your bottom dollar that the Chinese, like Hoover, like Roosevelt, and like Obama, will attempt unavailingly to use government mandates and higher taxes to correct the economy. A Chinese crash will be bad, very bad, so I hope that the Trump economic miracle I anticipate will have had the chance to gain traction so that we’re minimally affected by an economic earthquake in China.

And that’s what I’ve been thinking about instead of trade secrets, conversion, summary adjudication procedure, and other legal things that stultify my brain. Please pile on (politely, of course), to tell me everything I’ve gotten wrong with my procrastinatory ruminations.