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by Ivan Eland | September 30th, 2008
Financial institutions must be allowed to fail, and the market must be allowed to return to equilibrium.
In the topsy turvy world of Washington, to combat what is being called the “most momentous financial crisis since the Great Depression,” the Republicans have gone socialist and the Democrats are advocating the corporatism of Italian rightist dictator Benito Mussolini.
Fairly unique in U.S. history, the Bush administration has nationalized companies — insurance and mortgage guarantors — that have nothing to do with the war the country is fighting. During World War I, President Woodrow Wilson had the government seize and operate the railroads because they were deemed vital to producing war materiel for the troops. They were returned to private hands in 1920, two years after the war ended. Congress also gave Wilson the authority to seize and operate other industrial plants during the war, but took away this power when the conflict concluded.
During World War II, FDR declared a state of emergency and seized factories that were threatened by strikes. Congress ratified these seizures by passing the War Labor Disputes Act, which allowed the president to commandeer industrial plants and use them to produce war materiel. The Depression-era Reconstruction Finance Corporation was expanded, in a fit of war socialism, so that the government could provide items deemed key to the war effort — for example, petroleum distribution and rubber production.
In 1945 and 1946, under his explicit wartime authority as commander in chief, Harry Truman seized the railroads and coal mines and had the government operate them. In 1952, after this wartime authority had expired, Truman attempted by executive order, under what he called his “inherent power” as commander in chief (which George W. Bush has even more broadly claimed), to seize and operate steel mills during a strike. He claimed that he was doing this to prevent a paralysis of the national economy and used the rationale that soldiers in the Korean War needed weapons and ammunition. The Supreme Court, however, struck down Truman’s executive order, saying that it had no basis in the Constitution or statute. Thus, the Supreme Court essentially ruled that the president was commander in chief of the armed forces, but not the nation.
Although not constitutionally at war — since the required declaration of war was not obtained — Bush could argue that the companies he nationalized were critical to the war effort. Of course, everyone would laugh at the idea that home mortgages have anything to do with the wars in Iraq and Afghanistan. Even if they did, Wilson and FDR had or later got congressional authority for their wartime actions. Bush unilaterally and unconstitutionally socialized these companies for no good reason.
In addition to socializing AIG insurance company and Freddie Mac and Fannie Mae mortgage guarantors, Bush has bailed out investment bank Bear Stearns, while inconsistently letting the investment bank Lehman Brothers go under. This resembles Teddy Roosevelt’s favoritism of one company over another in trust busting.
Finally, Bush originally proposed giving the Treasury Secretary unprecedented power, with little oversight, to use a whopping $700 billion of taxpayers’ money to buy up financial institutions’ bad debt. When asked how the administration arrived at the $700 billion number, one anonymous administration official admitted that they had no analysis behind that number, but just wanted to make it big as a signal to the market (presumably that the federal cavalry was on the way with a massive welfare check for Wall Street). This resembles FDR’s and Lyndon Johnson’s lack of analysis before throwing money at the Great Depression and poverty during the 1930s and 1960s, respectively, just to show they were “doing something” about the problems.
Although President Bush likes to liken himself to Ronald Reagan, his presidency most closely compares with prior Democratic chief executives during wartime. As noted above, his socialism may be even worse than that of Woodrow Wilson and FDR because it has nothing to do with the wars he is fighting. Furthermore, he has increased domestic spending more than any president since Lyndon Johnson during the Vietnam era. But what would we expect from a Republican Party that — all of its grandiose “small government” rhetoric aside — was originally created as a big government party and, in all of its history, has advocated smaller government only during the Warren Harding and Calvin Coolidge administrations?
Meanwhile, in critiquing Bush’s bailout plan by insisting on taxpayer ownership in failed companies in order to profit if they turn around, the Democrats, pretending to be on the “left,” have adopted the corporatism of Italian dictator Benito Mussolini. Such public-private “cooperation” and interweaving was originally adopted during Woodrow Wilson’s administration during World War I and was the basis for the National Industrial Recovery Act — the original centerpiece of FDR’s New Deal — which was ruled unconstitutional by the Supreme Court.
Neither Republican socialism nor Democratic corporatism is the answer to the current financial “crisis.” The conventional mantra of the Democratic and Republican presidential candidates is that this problem was caused by a financial industry that was insufficiently regulated. In fact, the crisis was caused by previous government intervention and bailouts — for example, FDR’s bank holiday and the creation of the Federal Deposit Insurance Corporation during the New Deal and Bush’s father’s massive bail out of the Savings and Loan banks during the late 1980s and early 1990s. If the financial sector is regarded as too important to have difficulties or if particular financial institutions are regarded as “too big to fail,” they will engage in reckless practices that will end in “crisis,” thus leading to demands for yet more government action to fix the problems that prior government intervention caused.
This downward spiral must be broken. Financial institutions must be allowed to fail, and the market must be allowed to return to equilibrium. Such failures might very well induce a recession, but as Herbert Hoover discovered, throwing more credit at a market with excess credit only worsens the inevitable economic downturn. Let’s just hope the ill effects of this massive financial bail out don’t get that bad.
Originally published by the Independent Institute.
I wonder if this poor rant was written before or after the House rejected the bailout.
Regardless, it was a poorly written potshot at everyone. Republicans on the left? Granted, Bush deserves blame for even thinking a massive bailout was necessary, and it reeks of socialism. But Bush is one Republican, and the House Republicans essentially stopped this beast from happening. So going all crazy on a rant about Republicans being a leftist party is rather inane. They can act it sometimes, but this just seems like a petty rant by someone with a vendetta.
As for Democrats on the right, I'd like to touch that one, but I really cannot understand it well. How can a party that hates anything that makes a profit (or rather succeeds) be right-wing?
Also, one statement that I found rather interesting was this one: "As noted above, his socialism may be worse than that of Woodrow Wilson and FDR because it has nothing to do with the wars he's fighting." If you mean the "bailing out of businesses" then perhaps, but if you are just referring to socialism, WWII broke out in 1939 and the US did not get involved until 1941. FDR was elected in 1933 and he was already pushing his New Deal, effectively extending the Great Depression throughout most of his presidency.
Comment by Anderson | September 30, 2008
[...] institutions must be allowed to fail, and the market must be allowed to return to equilibrium. – Intellectual ConservativeFor those who join the President and House Majority Leader Steny Hoyer (D-Md) in complaining, "Doing [...]
Pingback by Bailout fails. World goes on. Pro Life| Today In Theology | September 30, 2008
Anderson
At first I did not think Mr Eland said Dems on the right, but going back I see he did say "Democrats are advocating the corporatism of Italian rightist dictator Benito Mussolini" Maybe my confusion and yours comes from the misplaced conception that Mussolini and Stalin represent opposites. They don't really. They both represent totalitarianism and the opposite is liberty and freedom.
Other than that point I think your comments are well taken.
Comment by Ivan Ivanovich | September 30, 2008
I am in full agreement with you about the illusionary thought that Fascism is somehow inherently polar to Communism. They may be different forms of expression, but as you noted, they serve the same purpose.
I guess I was thrown off by the weak attempt at portraying Democrats as to the right. The only possible thing to the right in this scenario would be the Democrats rejecting the bailout, but the only thing they are angry about is that Bush might steal their thunder (which won't matter because should it have failed, they would have blamed him regardless). He gave plenty of examples of Bush by comparing him to previous US Presidents and some of their actions, but with the Democrats, he only threw the name of Mussolini and saying he was for corporatism.
I was rather upset with this article not because of its material, per se, but rather the way it was presented. It was clearly a rant on Republicans and Bush (which is nothing new for this author), a weak attempt to act Independent by giving credit to and taking it back from the Democrats, and finally giving his proposed solution. I agree that the bailout could be disastrous, but was the poorly constructed rant necessary?
Comment by Anderson | September 30, 2008
Let’s start with some facts and definitions rather than Mr. Eland’s half-baked assumptions:
http://www.whitehouse.gov/news/releases/2008/09/print/20080929-2.html – details of recovery plan before Congress that has Bush approval. Upshot is Bush called on Congress to come up with a plan to avert a financial crisis he is convinced is will happen. He did not stipulate how this is to be done, leaving most of the details to Congress to work out. The so-called ‘Bush Plan’ may be bad economics and is certainly a case of government exceeding its mandate (statism), but is hardly socialism because, at the end of the day, all government is holding is a lot of paper.
Socialism consists in “state or collective ownership and administration of the means of production and distribution of goods, and the creation of an egalitarian society” ( http://en.wikipedia.org/wiki/Corporatism ). The Bush endorsed plan, cooked up by the Democrat run Congress, consists of the government buying up bad debt assets (paper), but does not result in government grabbing ownership or administration of private companies away from any banks or lenders.
Syndicalism might be a closer analogy to the Bush Plan, “a type of movement which aims to degrade capitalist societies (aka, capitalism) through action by the working class on the industrial front … [a] means both of overcoming capitalism and of running society in the interests of the majority” ( http://en.wikipedia.org/wiki/Syndicalism ). This too, is misleading because the Bush Plan does not subvert capitalism. Rather it provides a prop; one that ceases to operate on the body-corporate once the transfer of debt is made. Another name for syndicalism is ‘trade-unionism’, and this is hardly that, as no trade-unions are involved. Trade-unionism (syndicalism), therefore, is a collaboration of labor and government to capture industry and assume control of its operations, and to redistribute (plunder) its profits and other benefits; eliminating management and capital as (supposedly) unnecessary. FDR was a good example of a syndicalist.
Corporate-welfare are government bestowals of money grants, subsidies, tax-breaks, favored treatment of corporations or select corporations (favoritism); which bestowals are deemed excessive, unwarranted, wasteful, unfair, inefficient, or bought about through lobbying ( http://en.wikipedia.org/wiki/Corporate_welfare ). Bailouts are an instance of corporate-welfare. A bailout can be a direct grant of money, a loan, or an assumption of debt uncompensated by any transfer of assets.
http://en.wikipedia.org/wiki/Proposed_bailout_of_United_States_financial_system – one version of the current bailout, causes, and likely results from a clearly liberal (Democrat) point of view.
http://www.mises.org/story/3131 – an alternate explanation of what the bailout will accomplish by a fiscal-libertarian.
http://www.mises.org/story/3128 – the Von Mises Bailout Reader
While I am forced to agree with Mr. Eland’s tagline (“Financial institutions must be allowed to fail, and the market must be allowed to return to equilibrium.”), it is not for the reasons he gives; and his reasoning is, as usual, extremely faulty. He consistently fails to check his facts, terms, and assumptions for internal consistency. His misapplication of historical events to current situations and motivations is appalling in its breadth. For example, saying Bush asking Congress to bailout lenders is tantamount and superior to the seizing of assets by FDR and Truman is pure hogwash. The Bush Plan (to be administered by the next administration, offers to buy up assets; not seize them. The only seizure involved here is the additional taxes required to bailout the lenders (which Bush suggests will be paid back on the next guy’s watch), and no one so far is suggesting government lacks the authority to tax. Government making purchases and loans is, in fact, as old as the republic.
Comment by Bob Stapler | October 1, 2008
Oops, got one of my links confused (Post#5, 3rd paragraph, http://en.wikipedia.org/wiki/Socialism ).
I also meant to say something about Eland's misuse of corporatism. Corporatism is "a political or economic system in which power is held by civic assemblies that represent economic, industrial, agrarian, social, cultural, and/or professional groups. These civic assemblies are known as corporations (not the same as the legally incorporated business entities known as corporations, though may include those). " ( http://en.wikipedia.org/wiki/Corporatism ). Mussolini's fascism included elements of nationalism, corporatism, syndicalism, expansionism, social-progress anti-communism, censorship of subversives, and state-propaganda.
Comment by Bob Stapler | October 1, 2008
"Government making purchases…old as the republic"
Might we mention the Louisiana Purchase excuted in 1803 by Thomas Jefferson for $23M? Completly illegal, but a pretty good deal never the less.
Oh yes, and where did the money go? To a war in France.
Good points Bob
Comment by Ivan Ivanovich | October 1, 2008
Ivan,
To the Louisiana Purchase, we can add the Gadsden Purchase and Seward's Folly (Alaska Purchase). All three were considered over-priced, beyond our means, and hugely wasteful at the time they were made. The list of things government (state and federal) buy/sell sometimes deemed wasteful or inappropriate also include: cotton (to control market speculation), water/land rights/titles, patents, human-capital (slaves), political offices (e.g., New York port inspectorships), surplus crops, ordinance, ships and shipyards, bankrupt farms & farm mortgages, eminent-domain, Internet-access, oil & mineral rights, space exploration, bandwidth, secrets, and carbon-credits. And let's not forget the rampant abuse of government purchasing (influence peddling, votes, private homes & home improvements, cars, emergency issued credit-card frauds, sex, drugs & booze, travel, expensive trinkets, souvenirs, gifts, &c). Civil War abuse by both agents and contractors is still cited as the acme of corruption.
What this illustrates is not that government under Bush has been terrific, rather it illustrates it has been less odious than some and hardly more socialist than the outright confiscations of FDR and Truman. Nonetheless, I do not mean to let Bush and go-along Republicans off the hook just because they have been "less" confiscatory than the grand masters of 'principled' (aka, socialist) theft; but let's do put this in proper perspective.
What Bush is pushing is voodoo-economics in a panic spurred by political rhetoric that the economy is already in the tank. Maybe he's worried he'll go out on a sour note that will spoil his legacy, and maybe he's genuinely concerned it is a legacy he'll be ashamed of and/or concerned about the little guy he mistakenly believes is being crushed by greedy lenders. In the long politicization of the debate over whether this is or is not "8-years of the worst economic policy", rhetoric has come to dominate over common sense. Only a couple of sectors of the economy are feeling a real pinch. Elsewhere, loans and investments are still being made and consumer spending has not slowed a great deal. Pension funds and 401Ks are seeing some negative growth, but unless you are within a couple years of retirement or government does something to exacerbate a bad situation, we can count on a rebound once the market corrects. No one is starving or going without necessities. A handful of homeowners with very little equity are being forced to go back to renting; which is exactly where they would be had they not been given unsecured loans. Most of these can walk away and the few who can't, can be accomodated with far less than a $700bn industry bailout; but are, instead, exploited for political gain.
Comment by Bob Stapler | October 2, 2008