Heeding the lessons of the Great Depression
November 30, 2008
I was born near the end of the 1930s in eastern Oklahoma where the Dust Bowl compounded the worst economic disaster in our history.
Stories my parents told me of the hardships of the Great Depression were fresh on their minds and indelibly stamped on mine. Talk of economists that we are on the verge of another depression has given me flashbacks to the poverty I witnessed as a child.
We can only hope that what we have learned from the Great Depression will help us soften the blow this time around and that our worst fears will not be realized. There are many lessons to be learned from the Great Depression of what to do and what not to do.
Franklin D. Roosevelt took office nearly four years after the 1929 market crash. Many economists believe if effective government action had been taken earlier than 1933, the length and depth of the Great Depression would have been less. The lesson is this: Government needs to move fast and move effectively the minute a depression looms.
So far, not so good … until last week. The $700 billion bailout earlier this fall may have kept the financial markets from sliding into the abyss, but it did not free up the credit markets. Credit rates were higher and terms are harder to meet.
Mortgages, student loans, car loans, and decent credit card terms were difficult to get. Retail sales were grinding to a halt. Another bank with a large presence in the mortgage and consumer sectors, Citigroup, was about to tank.
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Consumers and small businesses account for nearly 70 percent of all economic activity in our country, and until we the people feel relief, the country will continue in economic agony. To those of us in the middle class trenches, it looks like the bailout money had been going to the big guys on Wall Street but not to us.
My spirits were lifted when the Bush administration, led by Treasury Secretary Henry Paulson, seems to have finally gotten it right. At last they understand they must do something for main street immediately instead of waiting to pass the buck to the Obama administration taking office fifty days from now.
Prior bailouts were simply an infusion of cash to boost the capital health of the failing enterprises. No strings were attached. The Bush administration made an about face last week in the Citigroup bailout. They attached some strings and took control. The Feds will have Citigroup buy out toxic mortgages. Excessive executive perks and bonuses were history.
Paulson also directed an $800 billion federal treasury guarantee for consumer and mortgage loans so that institutions would be willing to lend to consumers and small businesses at reasonable rates and terms. Fannie Mae and Freddie Mac (already under federal control) announced a moratorium on foreclosures lasting through the holidays.
Simultaneously, Barack Obama decided to make his plans very public in order to remove uncertainty in the financial and consumer markets .He announced his economic team, composed of seasoned, respected and experienced folks, some of the best and the brightest. My contacts on Wall Street tell me they are delighted and reassured that steady hands are at the wheel.
Obama sketched out what he wanted to do on Day One: Sign legislation that would create 2 .5 million jobs by infusing $700 billion of federal money into development of green industry, prop up education and medical care, and give states and local governments the ability to improve the nation’s crumbling bridges and infrastructure.
He would continue to allocate bailout money to the financial markets. He also recognized that that the ever-growing national debt could present a problem of inflation down the road, so he plans to cut government programs that were not working or were not contributing to his priorities.
The immediate reaction from the financial markets was favorable, with more than three straight days on the plus side and historic gains. Other than easier access to credit, consumers will not see much direct benefit until Obama’s stimulus plans get implemented next year.
Much to the credit of the Bush administration, they were OK with the Obama initiatives. In fact, the Obama team set about at once working on a daily basis with Paulson and coordinating policies for the future so that, as Paulson said, the transition to the new administration “would be seamless.” Paulson seemed to bend over backwards to avoid tying the new administration’s hands.
It is uncertain how much bipartisan support there will be for Obama’s economic stimulus package. Voters in November were clear they were looking to government action to fix their problems. The national debt was a secondary concern.
If congressional Republicans are viewed as obstructionists and present no substantive alternatives to Obama’s plans other than a continuation of Bush economics, they may be digging their political graves even deeper. Republicans could learn another lesson from the Great Depression. Voters blamed the Republicans for it and credited Franklin D. Roosevelt for coming to their rescue. As a result, Democrats remained in power for the next 20 years.
There is at least some hope on the horizon that our government is on top of the crisis. For that we can be grateful to both the Bush administration and to the Obama transition team for stepping up to the plate.
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