"In the years that followed , economists, politicians and Wall Street’s overpaid optimists assured one and all they’d learned from the orgy of greed and excess. It wouldn’t happen again. The Feds had saved the system and put new regulations in place to prevent a repeat. Trust us, they said. And in our ignorance, we did.
"Over time, the lessons of 1929 were made to seem irrelevant and outdated, especially in the go-go economic climate of the 1980s. Layer by layer, 1930s regulations were stripped away. Under pressure from Wall Street, free-market fundamentalists and their acolytes in the press, deregulation was promoted and accepted — by Democrats as well as Republicans — as vital in the emerging global economy.
"The 1929-2009 parallels don’t end there. Post-1929 Wall Street’s leaders fought regulation fiercely; likewise their current-day descendants. Whether it’s regulation of derivatives (the value of which few buyers or sellers understood), higher bank capital requirements, or protection for consumers, Wall Street’s current captains of capitalism are against it.
"Will they win Congress to their side? When have they not? There’s much talk of the need to tighten the reins on Wall Street, especially the trading of billlions [sic] in securities backed by such uncertain assets as mortgages and credit card debt. But legislation remains stalled.
"In this country, Paul Volker has sounded the "too-big" warning. And he’s called for reinstating Glass-Steagall. Volker’s the guy who broke the 1980-81 inflationary recession and set the stage for a generation-long economic expansion.
"Maybe we should listen. Beats laying another egg."
Here is my commentary:
Posted by zemack
October 29, 2009, 8:09PM
Substitute the words “Wall Street” with the name of any ethnic group, and the injustice and bigotry implied in the use of that scapegoat become obvious. Throw in the undefinablely vague bogeymen “greed and excess”, and you’ve got the classic one-two punch beloved of all statists. That’s all they need to whitewash the real causes of the litany of economic catastrophes listed by the Editors.
The Fed’s excess money and credit expansion and then contraction fueled the stock market bubble and crash of the late 1920s. The crash, however, did not cause the depression. The market began to recover almost immediately, just like after the much larger 1987 crash. But unlike 1987, the rally ensued until mid-1930 when the Smoot-Hawley tariff act, the first of a series of disastrous government attempts to “save” the economy, was enacted. As the farm economy subsequently contracted, bank after bank collapsed under the weight of anti-branching, anti-diversification rules and other incompetent banking regulations. The Fed-engineered 30% shrinking of the money supply, massive “public works” projects that further drained capital from the economy, massive tax hikes, etc., etc., etc, crushed the economy. The Hoover-Roosevelt Depression was on. The power-hungry, mad economic scientists of the FDR administration, building on the policy foundation of the statist Herbert Hoover, then embarked upon a crippling array of actions that stretched the depression right through the end of WW II. If ever there could be proof of the failure of government economic intervention, this period of American history is the poster child.
But as the Editors say, we haven’t learned much. The S&L fiasco was brought on by the grossly misnamed Federal Deposit “Insurance” Corporation, a socialist-like scheme that promotes risky bank lending while draining responsible banks, their depositors, and taxpayers who bail them out (the so-called privatization of profits and the socialization of losses).
The current crisis is unequivocally “made in Washington”. Deregulation? Who controls money, the raw material of the banking industry? Who sets reserve requirements, interest rates, accounting standards, and every other conceivable aspect of finance? Exactly what regulatory authority did the government rescind during the alleged “deregulation” wave of the past quarter century? Repeal of Glass-Steagall is the only thing the Editors can point to, and it was not even culpable in the meltdown. Regulation actually increased on the banks (remember Sarbanes-Oxley?).
“Captains of capitalism”? Where does anyone see capitalism? The financial sector is the most heavily regulated American industry, operating under the thumb of a central bank money monopoly. The fed, in fact, is once again the prime culprit. Led by a central planning statist masquerading as a “free market fundamentalist”, the Fed pursued extraordinarily easy money policies without which the basic cause of the recession, the housing bubble, couldn’t have happened. As always, excessive risk-taking is merely a consequence of incompetent Federal Reserve policy. Fannie & Freddie, the FDIC, the CRA, the government’s very own “Too big to fail” policies, and the Clinton/Bush affordable housing crusades, among other things, did the rest.
As to Paul Volcker, I disagree on reinstatement of Glass-Steagall. The diversification enabled by its repeal fosters stronger institutions. What should be repealed is the government’s bailout addiction, which encourages to big to fail “mastodons of the market [like] JP Morgan Chase and Goldman Sachs…” As to Volcker being “the guy who broke the 1980-81 inflationary recession and set the stage for a generation-long economic expansion”, the Editors conveniently forget that he caved in to election year pressure from the Carter administration in the spring of 1980, abruptly reversing course and setting the stage for an even worse “second dip” in the recession. As BanditGuy points out, it was President Reagan who gave Volcker political cover to return to some semblance of sound monetary policy, at great political cost to himself.
Some vague notions of “Wall Street” and “greed” are all the Star-Ledger editors have to hang their hats on. Everywhere one looks, one sees the hand of government intervention making a mockery of free markets. The real lessons of the past century are a history of catastrophic government policies creating economic havoc, with freedom and capitalism getting the blame, leading to more government controls, and so on. The current Washington assault on individual rights, the constitution, the rule of law, and the remnants of free markets is a continuation of the same disastrous trend, “on steroids”.