Financial Crisis or A System Change?
Published in Rzeczpospolita
(Poland) on 9-28-08
by Tomasz Wroblewski (link to original)
(Poland) on 9-28-08
by Tomasz Wroblewski (link to original)
Translated from
by Julita Kwapinska.
Edited by .
Out of all the questions of the last few days, the most important one remains unanswered. What has really finished? Cash or capitalism? Do you have a financial crisis or a system change? If it is the latter, then the recession will stay with us for many years. The experiences of the Great Depression and government interventionism in the thirties of last century have made liberals and supporters of the free market terrified up to date. They know that even if Congress approves the allocation of 700 billion dollars for the financial sector rescue plan, it does not necessarily mean that the crisis will be over.
Tracking bankers
Before George Bush made a speech, in Poland we heard about new restrictions on giving people credits. Someone came up with an idea of not selling stock to the poor. Still, someone else suggested that psychologists should study motivations of stock market players. Marek Zuber, economist and intercessor of the free market, argued that it was greed that caused the crisis. As if he had discovered a new phenomenon that is not an inherent part of human nature. Indeed, it has been responsible for crises from the dawn of history, but first and foremost it has contributed to the development of civilization.
Leftist commentators and common TV watchers thoughtlessly kept emphasizing the necessity of introducing stronger oversight over the financial sector throughout the whole weekend. However, very few actually checked that falling investment banks like Fannie Mae, Freddie Mac, Lehman Brothers, Merill Lynch and Washington Mutual had been the most heavily supervised entities of the financial sector. They are going bankrupt because their hands are tied. Meanwhile, John Kay of the Financial Times writes that hedge funds are responsible for the risky real estate transactions. They are fine and have a great deal of freedom. They can quickly transfer their assets without any risk for the investors.
All of that does not pose an obstacle for politicians to track greedy and fat bankers, or as presidential candidate Barack Obama has nicely put it: those who are responsible for this state. Democrats want to pinpoint those who are responsible for the crisis and get control of the entire package of stricter regulations. David Brooks, conservative commentator of the New York Times, has ridiculed the politically attractive ideas of Obamas Democrats by stating that they make us believe that we can still gamble, but without any risk now.
Intervention without retaliation
Before we take a pill to cure problems of this world and reject the free market, we need to remember that the Great Depression was not a result of one stamp in Wall Street. It was great because it spread over all the sectors of economy and lasted longer than any other crisis in the 20th century. If there was something missing in those difficult years, it definitely was not government intervention. There was more than enough of that.
In the first days of his term, president Franklin Delano Roosevelt did almost exactly the same as what Congress wants to do now. He separated good assets from bad ones. In accordance with the agreement reached on Sunday, the Department of Treasury is
supposed to purchase risky mortgage-related assets and sell them as quickly as possible on the secondary market, so as to make the losses of taxpayers minimal.
In 1934, the Securities and Exchange Commission was founded to serve the same purpose. Apart from bad assets, it was supposed to control transactions on the stock market and help rebuild financial institutions. The market was tidied up and we could see the first signs of economic stability by 1935. A similar mechanism to the one used in the thirties has been already used multiple times in the USA as well as in Europe. In the mid nineties the Clinton administration used it to overcome the crisis of savings and loan associations. And in 1992 it saved the Swedish bank system threatened by the collapse of the mortgage loan market.
Then minister of finance Bo Lundgren, who has been recently asked for help by Washington, founded a separate agency providing a guarantee for risky loans. It did not take over shares of any of the banks, contrary to what Democrats in the USA are now trying to do. Instead, he let those companies that could not reform their mortgage wallet go bankrupt. Nevertheless, after one year the best institutions like the biggest Swedish bank SEB started to yield profits thanks to their guarantees. The cost of the entire project turned out to be less than 2% of national income for Swedish taxpayers (in America it is said that the costs would be 5%). The plan was brave and consistently enforced. The attitude of politicians- no retaliatory actions was as equally important as financial support. They did not attempt to control private institutions or settle accounts with bankers themselves. Swedish Prime Minister Carl Blindt managed to avoid what Roosevelt did not and judging by Democratic vice president nominee Joe Bidens rhetoric America might lose this time around as well.
Where the wealth is coming from
Witch hunting has already started. Barack Obamas campaign has quickly specialized in attacks on speculators. Here we find a lot of similarities to the 1934 campaign and Roosevelt who was mocking the wealth in America by saying that it was not trickling down, but liquefying. Obama stresses that today we need to find out where wealth is trickling down. Now CEOs of Lehman, Freddie and Fannie are the synonyms of evil. Their mansions and earnings are fueling the minds of leftist publicists.
In the thirties, Samuel Insull, a millionaire of English origin, became the hero of the so called yellow press (media that lived on scandals). He was in control of most of the electricity supply in the USA. Insull kept taking loans to finance consecutive railway companies and real estates using his informal and dynamically developing monopoly as a guarantee. The stock market crash razed his holding to the ground with some of the cities facing risk of losing electricity supply. Insull ran away to Greece. Then deported, he was brought to trial. He was called the bloodsucker by the media, but was eventually set free.
Blood-seeking Democrats immediately filed another suit, only this time against Andrew Mellon, former Secretary of Treasury. Mellon (similarly to FED CEO Allan Greespan) was accused of deregulations, allowing too much freedom, which made the rich loaded and put ordinary citizens in poverty. During the long and stormy trial, Mellon was cleared of all charges. The crisis continued together with the unemployment growth, however, the officials did not want to give up looking for the guilty. Mindful of those experiences, Ben Bernanke demanded to be discharged from liability while putting forward his financial sector rescue plan.
American newspapers in the mid thirties were full of titles expressing hatred towards the business sector. There was pressure put on public prosecutors and the IRS to deal with the speculators more effectively. President Roosevelt liked to call them certain gentlemen.
The Congress Commission established to reform the system, the so-called Pecora Committee (named after its chairman Ferdinand Pecora), was not tough enough according to the majority of Democrats. Its sittings soon turned into some kind of court judging the worlds rich and usually ended up only with making accusations of submitting a smaller income on tax return forms. The committee also put forward several proposals aimed at increasing government oversight over financial institutions so that the rich could never take advantage of the poors poverty again as young, feisty Democrat Wright Patman said.
One of the most dramatic appearances in front of the commission was that of Richard Whitneys, head of NYSE who said: One day America will thank us for having opposed the populist demands of some of these stupid reforms.
At some point the IRS had more agents dealing with stock market abuses than the police in New York itself. Head of Department of Internal Affairs Harold L. Ickes was carrying out never ending investigations in the name of citizen and work laws. His agents would make companies go bankrupt.
A similar effect was caused by attempts to artificially revive economy by decrees increasing the poors income. When the Supreme Court declared it unconstitutional, in 1935 Roosevelt forced through a bill granting privileges for labor unions which quickly enforced the increase in wages.
The hopes that it would translate into the rise of consumption turned out to be vain. The economy instead of getting better became weaker and weaker due to the escalation of wage-related demands. More companies went bankrupt. The production decreased. In 1938, America once again stood on the verge of a financial crisis. WWII did not only raise production, but also forced politicians to find enemies somewhere else.
The threat of slowing down the reforms
Without understanding the events in those years, it is hard to grasp the dramatic character of the current debate in the USA. 700 billion dollars spent on the financial sector rescue plan is not the only cost. Conservative politicians in Congress are afraid that far reaching government interventionism would limit civil liberties, restrain the free market and turn the crisis into a long-term collapse. The idea of taking over shares of endangered companies and controlling employees wages could mean the incapacitation of some of the banks and instead of speeding up the reforms, slow them down.
Democratic authors of the current economy rescue plan assure that the Department of Treasury will try to sell the government-owned shares of private institutions as quickly as possible. The question occurs whether people delegated to manage those banks would think the same. Or whether they would act like supervisory boards in Poland that are doing anything to have control over state-owned companies as long as possible. Republicans managed to add a clause to the plan replacing purchasing of stocks with loan securities whenever it is possible. Following the Swedish example, they want to limit the government involvement.
The doubts about giving the Department of Treasury and its police too much power are not an invention of liberal theorists. What causes them are the bad experience of government interventionism in the thirties.
Populism, just as global money, can quickly jump over the ocean. In Poland there are favorable conditions for it. Not only because of the remains of socialist awareness in the society. We also have the very influential new Left, deeply anchored in the media, looking for authorities in the West who have been calling for the restoration of National Socialism for a long time. For example, people like belittled Leftist thinker Jeremi Rifkin, who has been relegated to the third league, could now refer to Obamas new capitalism.
Tracking bankers
Before George Bush made a speech, in Poland we heard about new restrictions on giving people credits. Someone came up with an idea of not selling stock to the poor. Still, someone else suggested that psychologists should study motivations of stock market players. Marek Zuber, economist and intercessor of the free market, argued that it was greed that caused the crisis. As if he had discovered a new phenomenon that is not an inherent part of human nature. Indeed, it has been responsible for crises from the dawn of history, but first and foremost it has contributed to the development of civilization.
Leftist commentators and common TV watchers thoughtlessly kept emphasizing the necessity of introducing stronger oversight over the financial sector throughout the whole weekend. However, very few actually checked that falling investment banks like Fannie Mae, Freddie Mac, Lehman Brothers, Merill Lynch and Washington Mutual had been the most heavily supervised entities of the financial sector. They are going bankrupt because their hands are tied. Meanwhile, John Kay of the Financial Times writes that hedge funds are responsible for the risky real estate transactions. They are fine and have a great deal of freedom. They can quickly transfer their assets without any risk for the investors.
All of that does not pose an obstacle for politicians to track greedy and fat bankers, or as presidential candidate Barack Obama has nicely put it: those who are responsible for this state. Democrats want to pinpoint those who are responsible for the crisis and get control of the entire package of stricter regulations. David Brooks, conservative commentator of the New York Times, has ridiculed the politically attractive ideas of Obamas Democrats by stating that they make us believe that we can still gamble, but without any risk now.
Intervention without retaliation
Before we take a pill to cure problems of this world and reject the free market, we need to remember that the Great Depression was not a result of one stamp in Wall Street. It was great because it spread over all the sectors of economy and lasted longer than any other crisis in the 20th century. If there was something missing in those difficult years, it definitely was not government intervention. There was more than enough of that.
In the first days of his term, president Franklin Delano Roosevelt did almost exactly the same as what Congress wants to do now. He separated good assets from bad ones. In accordance with the agreement reached on Sunday, the Department of Treasury is
supposed to purchase risky mortgage-related assets and sell them as quickly as possible on the secondary market, so as to make the losses of taxpayers minimal.
In 1934, the Securities and Exchange Commission was founded to serve the same purpose. Apart from bad assets, it was supposed to control transactions on the stock market and help rebuild financial institutions. The market was tidied up and we could see the first signs of economic stability by 1935. A similar mechanism to the one used in the thirties has been already used multiple times in the USA as well as in Europe. In the mid nineties the Clinton administration used it to overcome the crisis of savings and loan associations. And in 1992 it saved the Swedish bank system threatened by the collapse of the mortgage loan market.
Then minister of finance Bo Lundgren, who has been recently asked for help by Washington, founded a separate agency providing a guarantee for risky loans. It did not take over shares of any of the banks, contrary to what Democrats in the USA are now trying to do. Instead, he let those companies that could not reform their mortgage wallet go bankrupt. Nevertheless, after one year the best institutions like the biggest Swedish bank SEB started to yield profits thanks to their guarantees. The cost of the entire project turned out to be less than 2% of national income for Swedish taxpayers (in America it is said that the costs would be 5%). The plan was brave and consistently enforced. The attitude of politicians- no retaliatory actions was as equally important as financial support. They did not attempt to control private institutions or settle accounts with bankers themselves. Swedish Prime Minister Carl Blindt managed to avoid what Roosevelt did not and judging by Democratic vice president nominee Joe Bidens rhetoric America might lose this time around as well.
Where the wealth is coming from
Witch hunting has already started. Barack Obamas campaign has quickly specialized in attacks on speculators. Here we find a lot of similarities to the 1934 campaign and Roosevelt who was mocking the wealth in America by saying that it was not trickling down, but liquefying. Obama stresses that today we need to find out where wealth is trickling down. Now CEOs of Lehman, Freddie and Fannie are the synonyms of evil. Their mansions and earnings are fueling the minds of leftist publicists.
In the thirties, Samuel Insull, a millionaire of English origin, became the hero of the so called yellow press (media that lived on scandals). He was in control of most of the electricity supply in the USA. Insull kept taking loans to finance consecutive railway companies and real estates using his informal and dynamically developing monopoly as a guarantee. The stock market crash razed his holding to the ground with some of the cities facing risk of losing electricity supply. Insull ran away to Greece. Then deported, he was brought to trial. He was called the bloodsucker by the media, but was eventually set free.
Blood-seeking Democrats immediately filed another suit, only this time against Andrew Mellon, former Secretary of Treasury. Mellon (similarly to FED CEO Allan Greespan) was accused of deregulations, allowing too much freedom, which made the rich loaded and put ordinary citizens in poverty. During the long and stormy trial, Mellon was cleared of all charges. The crisis continued together with the unemployment growth, however, the officials did not want to give up looking for the guilty. Mindful of those experiences, Ben Bernanke demanded to be discharged from liability while putting forward his financial sector rescue plan.
American newspapers in the mid thirties were full of titles expressing hatred towards the business sector. There was pressure put on public prosecutors and the IRS to deal with the speculators more effectively. President Roosevelt liked to call them certain gentlemen.
The Congress Commission established to reform the system, the so-called Pecora Committee (named after its chairman Ferdinand Pecora), was not tough enough according to the majority of Democrats. Its sittings soon turned into some kind of court judging the worlds rich and usually ended up only with making accusations of submitting a smaller income on tax return forms. The committee also put forward several proposals aimed at increasing government oversight over financial institutions so that the rich could never take advantage of the poors poverty again as young, feisty Democrat Wright Patman said.
One of the most dramatic appearances in front of the commission was that of Richard Whitneys, head of NYSE who said: One day America will thank us for having opposed the populist demands of some of these stupid reforms.
At some point the IRS had more agents dealing with stock market abuses than the police in New York itself. Head of Department of Internal Affairs Harold L. Ickes was carrying out never ending investigations in the name of citizen and work laws. His agents would make companies go bankrupt.
A similar effect was caused by attempts to artificially revive economy by decrees increasing the poors income. When the Supreme Court declared it unconstitutional, in 1935 Roosevelt forced through a bill granting privileges for labor unions which quickly enforced the increase in wages.
The hopes that it would translate into the rise of consumption turned out to be vain. The economy instead of getting better became weaker and weaker due to the escalation of wage-related demands. More companies went bankrupt. The production decreased. In 1938, America once again stood on the verge of a financial crisis. WWII did not only raise production, but also forced politicians to find enemies somewhere else.
The threat of slowing down the reforms
Without understanding the events in those years, it is hard to grasp the dramatic character of the current debate in the USA. 700 billion dollars spent on the financial sector rescue plan is not the only cost. Conservative politicians in Congress are afraid that far reaching government interventionism would limit civil liberties, restrain the free market and turn the crisis into a long-term collapse. The idea of taking over shares of endangered companies and controlling employees wages could mean the incapacitation of some of the banks and instead of speeding up the reforms, slow them down.
Democratic authors of the current economy rescue plan assure that the Department of Treasury will try to sell the government-owned shares of private institutions as quickly as possible. The question occurs whether people delegated to manage those banks would think the same. Or whether they would act like supervisory boards in Poland that are doing anything to have control over state-owned companies as long as possible. Republicans managed to add a clause to the plan replacing purchasing of stocks with loan securities whenever it is possible. Following the Swedish example, they want to limit the government involvement.
The doubts about giving the Department of Treasury and its police too much power are not an invention of liberal theorists. What causes them are the bad experience of government interventionism in the thirties.
Populism, just as global money, can quickly jump over the ocean. In Poland there are favorable conditions for it. Not only because of the remains of socialist awareness in the society. We also have the very influential new Left, deeply anchored in the media, looking for authorities in the West who have been calling for the restoration of National Socialism for a long time. For example, people like belittled Leftist thinker Jeremi Rifkin, who has been relegated to the third league, could now refer to Obamas new capitalism.
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