The New Empire of Debt: The Rise and Fall of an Epic Financial Bubble (50 page)

“A new World Dawns,” proclaimed Britain’s
Daily Mirror
.
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“They did it.They really did it,” wrote the
Guardian
. “. . . the American people yesterday stood in the eye of history and made an emphatic choice for change . . . .”
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It’s the “End of the National Nightmare,” said
TIME
magazine.

People looked at Obama and they thought they saw a young Kennedy; they thought they might be able to rerun the tape from an earlier period in U.S. history, and do a little editing. They longed for the New Frontier without the Vietnam War, a Camelot without Lee Harvey Oswald.

Amid the effervescence came the French. Obama’s victory “arouses a wild yet reasonable hope,” claimed Bernard-Henri Levi in the
Financial Times
. Mr. Obama’s election will affect us in “at least three concrete ways,” he continued . . . a decisive turning point in dealing with the ‘racial question’ in the U.S. . . . hope for an America that began doubting its ‘famous mission’ . . . and with Obama representing the USA, anti-Americanism . . . will have a harder time surviving and it will be forced to revisit its sales pitch.”
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They shouldn’t let French philosophers comment on American politics; they take the whole thing far too seriously. Besides, you never know what they are talking about anyway. Nobody knows what America’s “famous mission” is—certainly not the Americans themselves. And if those are his “concrete” ways, we’re glad Mr. Levi is not building bridges. There was nothing concrete about the hopes Mr. Obama’s victory aroused. Just the contrary: They were all gas. But Le Monde saw it clearer. Not only was the paper happy to see the United States finally rinse the stain of racism out of the Stars and Stripes, it was glad to see Americans give free market capitalism the flush, too.

Obama will be “reviving the role of regulation in the U.S.; [devising] tax policies to smooth out increasingly wide socio-economic divides; planning a healthcare system appropriate to the country’s wealth,” said the paper.
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In other words, he will be putting in a system of state-directed capitalism, just like they have in France.

None of the commentators really understood Obama’s triumph. They saw in it a yearning for truth and a stretch for progress. It was nothing of the sort. The last thing voters want is the truth; they will reject it if it is put in front of them. Instead, what they want is diversion from the real world. What they hope to get from their leaders is something for nothing. If they could only get from politics what was rightfully theirs from their own labors, what would be the point of voting? No, voters always hope for something more: a fantasy. Something to cheer them up when they are down. Or something to give them a fright when they are up.

The last period of great national trial, 1914-1945, with its wars, epidemics, Dust Bowls, hyperinflation, Great Depression, mass murders, bankruptcy, and revolutions, was the era in which Americans elected Franklin Roosevelt. He told them they had “nothing to fear but fear itself.” It was all in their heads! It was a whopper, but it was the whopper they wanted to hear.

In the United States of America, in the late imperial period, the Bush Administration worked hard to make people fearful—with its torture chambers and preposterous “threat levels.” But the terrorists wouldn’t cooperate; they failed to blow up even a trash truck. Then, in the fall of 2008, the mob began to sweat for real. People were afraid of losing their houses, their jobs, and their retirements. That’s why Obama won; it had nothing to do with national redemption or Sarah Palin. When the world was safe and plush, the mob wanted to feel the frisson of danger. What the public wanted in November ’08 was safety: a movie with a happy ending, not a horror flick. Obama appeared the calmer, more intelligent, candidate.Voters could imagine him as the “black Roosevelt” giving soothing fireside chats and telling the lies they most wanted to hear.

And so, in the national narrative, one cockamamie bamboozle took the place of the one that went before. Americans were supposed to have been racists; now they were supposed to color-blind. They were supposed to have been fearful; now they were supposed to be confident.They were supposed to defend free market capitalism to their last breath; now they turned to the state and begged it to protect their last dime.

THESE FIREFIGHTERS ARE PYROMANIACS!

In the preceding 100 years there were only two fires similar to the inferno that began in the fall of 2008.The first conflagration was in 1929, centered in New York. The second was in 1990, when Tokyo went up in flames. In both instances, rescuers took extraordinary measures.And in both cases, they not only failed to save the economy, they scorched it even more. Obviously, few economists share this analysis with us. The few who do are probably either insolvent or insane, or perhaps both. So, the burden of proof is on us.

We begin by calling a ghost as an expert witness:

Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate . . . . It will purge the rottenness out of the system . . . values will be adjusted, and enterprising people will pick up the wrecks from less competent people . . . .

That was the advice from U.S. Treasury Secretary Andrew Mellon. In October of 2008, scores of commentators went to the cemetery. Not one channeled Mellon. Instead, they summoned the shadow of Franklin Roosevelt. He “understood that his first job was to restore confidence,” wrote David Brooks in the
New York Times
.
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Over in the
Financial Times
, Martin Wolf even quoted Roosevelt’s puerile remark that “the only thing we have to fear is fear itself ”.
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What about 25 percent unemployment, one might have asked?

[W]e might have done nothing. That would have been utter ruin. Instead we met the situation with proposals . . . of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic . . . . Some of the reactionary economists urged that we should allow the liquidation to take its course until we have found bottom . . . .We determined that we would not follow the advice of the bitter-end liquidationists . . . .
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That quotation comes neither from Paulson nor Bernanke, but from another ghost. Herbert Hoover has gotten the reputation for being a “do nothing” president. Would it were so! When Herbert Hoover passed the baton to Roosevelt, his can-do meddling had already helped turn a financial crisis into a Great Depression.You see, ghosts are often morons too.

Poor Andrew Mellon was shouldered aside in the early ’30s. Then, Hoover got to work. His first improvement is known to us by two blunder-buddies who turned it into law: Misters Smoot and Hawley. The idea was to protect U.S. business by imposing higher tariffs on foreign trade. A group of 1,000 economists, bankers, and other notables realized that blocking trade at the onset of an economic slump would be suicide.They urged him to veto the bill. But Hoover believed in tariffs as he believed in almost all other forms of government interference. He signed the bill with approval.

He called on the Fed to provide “an ample supply of credit at low rates of interest,” and initiated a program of public works, including the Hoover Dam, a massive lump of concrete that blocks the Colorado River. He threatened federal regulation of the New York Stock Exchange and attacked short selling.

Hoover’s chief concern seemed to be to hold up the price of labor. He cut off immigration, in an effort to keep out wage competition. Then, he got the business community to pledge that it would not reduce wages. Since the cost of labor was then too high for the closely shaved profit margins, businesses could not hire. Unemployment rose.

Roosevelt was a better politician, which is to say, he was more shameless. He attacked Hoover for spending too much money, won the presidency, and then spent more. He began so many agencies and projects—from the AAA (Agriculture Adjustment Act) to the CCC (Civilian Conservation Corps) to the SSA (Social Security Act)—that he practically ran out of alphabet. He also imposed wage and price controls, as well as limits to executive salaries.

In his classic book on the subject,
America’s Great Depression
, Murray Rothbard, once professor at the University of Las Vegas, now among the forgotten dead, explains that a properly functioning economy is balanced. One industry enjoys an expansion, another suffers a contraction. But sometimes there is a “cluster of errors” that causes a major boom.Whence cometh these errors? Who is responsible for them? Rothbard identifies the culprit: “monetary intervention in the market, specifically bank credit expansion to business.” If Rothbard were still among the quick, he’d probably be pointing his finger at Alan Greenspan, the arsonist who lowered the key U.S. lending rate to an “emergency” level of 1 percent and held it there long after the emergency was over. Then, he’d probably point at Ben Bernanke, who continues to add kindling . . . and to Hank Paulson, who led Goldman Sachs while it created trillions of dollars worth of asset-backed explosives and sold it to financial institutions all over the world.

“The boom . . . is the time when errors are made . . . ,” Rothbard continues. “The ‘depression’ is actually the process by which the economy adjusts to the wastes and errors of the boom . . . . Far from being an evil scourge, [the depression] is the necessary and beneficial return of the economy to normal . . . . Evidently, the longer the boom goes on the more wasteful the errors committed, and the longer and more severe will be the necessary depression readjustment.”

But here come the firefighters with yet more dry wood! After stoking the flames with easy credit, they bring more. Professor Rothbard, reviewing the record of the post-’29 rescue team came to this conclusion: The authorities “met the challenge of the Great Depression by acting quickly and decisively . . . [using] every tool, every device of progressive and ‘enlightened’ economics, every facet of government planning to combat the depression.”

Yet, the conflagration didn’t go out. It intensified.An expected recovery in 1931 went up in smoke, says Rothbard, thanks to government interference. Instead of a panic and quick recovery—a la 1921—the U.S. economy went into a long, hard on-again, off-again depression that put a quarter of the workforce out of a job. It might have lasted until the ’50s had it not been for the biggest public works program of all time: World War II.

“The guilt for the Great Depression,” Rothbard writes, “must, at long last, be lifted from the shoulders of the free-market economy and placed where it properly belongs: at the doors of politicians, bureaucrats and the mass of ‘enlightened’ economists. And in any other depression, past or future, the story will be the same.”

Six decades and half a world away, the Japanese proved him right. In January, 1990, a spark touched off the Nikkei Dow. Soon, Japan’s miracle economy was in trouble. Bankruptcies rose. Profits fell. Banks teetered. But the Japanese had their economists, too. And soon, they were doing what Hoover and Roosevelt had done before them. As to monetary stimulus, the Bank of Japan’s key lending rate was cut from 5 percent down to “effectively zero.” And there were plenty of fiscal stimuli too. Japan’s government did just what Keynes recommended—it spent money.

Keynes’s idea was already 2,000 years old when he thought of it. It came right out of the Bible story of the seven fat years and the seven lean years. Pharaoh knew people wouldn’t be smart enough to save grain for themselves.They’d make a mistake—they’d eat it all. So he stocked up grain in the fat years, then released it to the people when the lean years came. Keynes said the government should do the same: run surpluses in the good years and deficits in the bad ones. Since then, of course, governments have proven very able at running deficits, even in the fat years. It’s the surpluses they have trouble with. So, instead of giving out stored-up grain, they give out grain that hasn’t even been planted yet.

The Japanese government went on a spree of what Alan Booth calls “state sponsored vandalism” in the 1990s, taking the budget deficit to a remarkable 5 percent of GDP in 2002.
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Roads to nowhere, concrete shorelines, bridges and dams. Japan, per square mile of available territory, covered 30 times as much surface in concrete as in America. The Japanese were spending beaucoup money; in 1996, the Shumizu Corporation even announced plans to build a hotel on the moon using specially developed techniques for making cement on the lunar surface.

Once again, these heroic efforts produced nothing more than farcical consequences. The Japanese economy is still barely on speaking terms with prosperity. And the Nikkei Dow closed 2008 at 9,043—30,000 points below the high it set 20 years earlier.

“It was horrible! Horrible! Like lightning had struck. No one was prepared.

You cannot imagine the rapidity with which the whole thing happened.

The shelves in the grocery store were empty.There was nothing you could buy with your paper money.”
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In 1993, Friedrich Kessler, law professor at Harvard, described an event from his past: the Weimar Republic’s hyperinflation. He might have been describing the future, too.

By the beginning of 2009, all over the world, the inflation pumps were running hot. In Australia, the government announced a stimulus program. Checks of $1,000 per child will be sent to deserving parents. Senior citizens will get $1,400.

The Japanese had a 5 trillion yen rescue program . . . and then, two weeks before Christmas, they threw in 4 trillion more. Europeans were in for $1.8 trillion. But in the United States, the pumps were practically burning up. The Americans put up $8.5 trillion, including $120 billion to bail out a group of foreign countries, as well as the homeland. And that was before adding in Obama’s bailouts.