Summary: Twenty months into this downcycle, its nature remains invisible to most Americans. We see only parts, neither the whole nor its place in history. Many posts on this site have attempted to explain the former; this post attempts the latter. I believe that seeing today’s events in the light of our past shows the best path for us to take.
Note: I have received many emails asking what I think should be done. That misunderstands the role of this site, which seeks to help Americans better understand our changing world. Posts are never directed at our ruling elites, but intended to show America that there are alternatives to the choices offered to us.
This is just another crisis
Consider recent events as a step in the long evolution of the American State. Financial crises and wars have shaped our nation.
(1) The Founders, led by Secretary of the Treasury Hamilton, choose to have the new nation take on the burden of repaying the 13 State’s war debts and the war loans from France. Rather than take the easy path of defaulting, we take the difficult road and lay the foundation for America’s reputation and prosperity.
(2) During the next 150 years we incur loans during wars and pay them off afterwards. Inflation averages near zero. Growth is among the fastest the world has ever seen.
(3) President Johnson’s combination of the Great Society programs and the Vietnam War — guns and butter — strained the national finances. Under a gold standard, this was expressed — or signaled — by an outflow of gold. Rather than deal with the actual problems, President Nixon decisively breaks the pattern of American history. He takes us off the gold standard in 1971. The problems remain, and grow worse and deeper during the 1970’s.
(4) As these problems grow to crisis levels, President Carter appoints Paul Volcker as Chairman of the Fed. He takes drastic actions, which send the economy into the 1980-82 recession — in many ways the worst since the Great Depression. Presidents Carter and Reagan take additional reforms — such as deregulation of industry, forced reform of unions, tax cuts, decontrol of oil prices. These lays the foundation for a 25-year long economic expansion.
(5) Volcker’s successor, Alan Greenspan, and our Executive and Congressional leaders fail to continue these reforms. Worse, every crisis is met with additional monetary and fiscal easing — with insufficient tightening after the situation calms down. Debts grow at an accelerating rate, reaching levels not seen since 1929 — and then exceeding those records.
Today: We again face a crisis. Will we take the difficult road — as we did at the Founding, after each war, and in the Volcker-Reagan era? Or will we take the easy road — as we did in the Nixon and Greenspan eras? Each of us knows which is which. Much depends on our decision in the next year or two.
What are the key factors to consider?
There is no need to spell these things out. These decisions are not complex at the general level on which we provide guidance to Congress and the President. The details are best left to experts, but the values on which the plan is built must come from us. Here’s my list.
- Fidelity to our core values, which should guide us in troubled times — or they are useless.
- Social justice — we need to see that the less fortunate are protected as best we can.
- Prosperity for our children, and their children; taking the path to long-term success for America.
The Paulson Plan reflects a very different vision of America. I believe that we all know that, which accounts for the haste and panic used to ram it through Congress. Reflection and reason are its enemies.
One way or another, the resulting bill Congress passes and President Bush signs will reflect our values. Or our ignorance and apathy (it comes to much the same thing).
“The road less traveled” by Robert Frost
Two roads diverged in a yellow wood
And sorry I could not travel both
And be one traveler, long I stood
And looked down one as far as I could
To where it bent in the undergrowth
Then took the other as just as fair
And having perhaps the better claim
Because it was grassy and wanted wear
Though as for that, the passing there
Had worn them really about the same
And both that morning equally lay
In leaves no step had trodden black
Oh, I kept the first for another day!
Yet, knowing how way leads onto way
I doubted if I should ever come back
I shall be telling this with a sigh
Somewhere ages and ages hence
Two roads diverged in a wood
And I took the one less traveled by
And that has made all the difference
Here is an online petition, with objections to the Paulson Plan very similar to those in this post, with 160 names on it so far.
To the Speaker of the House of Representatives and the President pro tempore of the Senate:
As economists, we want to express to Congress our great concern for the plan proposed by Treasury Secretary Paulson to deal with the financial crisis. We are well aware of the difficulty of the current financial situation and we agree with the need for bold action to ensure that the financial system continues to function. We see three fatal pitfalls in the currently proposed plan:
1) Its fairness. The plan is a subsidy to investors at taxpayers� expense. Investors who took risks to earn profits must also bear the losses. Not every business failure carries systemic risk. The government can ensure a well-functioning financial industry, able to make new loans to creditworthy borrowers, without bailing out particular investors and institutions whose choices proved unwise.
2) Its ambiguity. Neither the mission of the new agency nor its oversight are clear. If taxpayers are to buy illiquid and opaque assets from troubled sellers, the terms, occasions, and methods of such purchases must be crystal clear ahead of time and carefully monitored afterwards.
3) Its long-term effects. If the plan is enacted, its effects will be with us for a generation. For all their recent troubles, Americas dynamic and innovative private capital markets have brought the nation unparalleled prosperity. Fundamentally weakening those markets in order to calm short-run disruptions is desperately short-sighted.
For these reasons we ask Congress not to rush, to hold appropriate hearings, and to carefully consider the right course of action, and to wisely determine the future of the financial industry and the U.S. economy for years to come.
Please share your comments by posting below. Please make them brief (250 words max), civil, and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).
Key Treasury Department documents
We cannot plead the “we didn’t know the details in the fine print” excuse. The important details about this massive nationalization have been clearly spelled out for us. See this page for a current list of Treasury Department documents.
Some FM posts about the current crisis
Treasury Secretary Paulson leads us across the Rubicon, 9 September 2008
High priority report: a geopolitical sitrep on the financial crisis, 15 September 2008
Say good-bye to the old America. Welcome to our new socialist paradise!, 17 September 2008
Another voice warning about the nationalization of AIG, 18 September 2008
A vital but widely misunderstood aspect of our financial crisis, 18 September 2008
A new sitrep, as we move into phase 3 of the financial crisis, 19 September 2008
Another step away from our Constitutional system, with applause, 19 September 2008
What do we know about the financial crisis? What are the key questions?, 20 September 2008
Slowly a few voices are raised about the pending theft of taxpayer money, 21 September 2008
America appoints a Magister Populi to deal with the financial crisis, 21 September 2008
Legal experts discuss if the Paulson Plan is legal, 21 September 2008
Essential steps to surviving the current crisis, 23 September 2008
For a full listing see the FM reference page about the Financial crisis – what’s happening? how will this end?.
A few of the most important posts warning about this crisis
This crisis has long been forecast by many, including in articles on this site. Even now that we are in the whirlwind, these provide valuable background material on its causes — and speculation about the results. To see the all posts on this subject, go to the FM reference page about The End of the Post-WWII Geopolitical Regime. Here are some of those posts.
A brief note on the US Dollar. Is this like August 1914?, 8 November 2007 — How the current situation is as unstable financially as was Europe geopolitically in early 1914.
The post-WWII geopolitical regime is dying. Chapter One, 21 November 2007 — Why the current geopolitical order is unstable, describing the policy choices that brought us here.
We have been warned. Death of the post-WWII geopolitical regime, Chapter II, 28 November 2007 — A long list of the warnings we have ignored, from individual experts and major financial institutions (links included).
Death of the post-WWII geopolitical regime, III – death by debt, 8 January 2008 – Origins of the long economic expansion from 1982 to 2006; why the down cycle will be so severe.
Geopolitical implications of the current economic downturn, 24 January 2008, – How will this recession end? With re-balancing of the global economy, so that the US goods and services are again competitive. No more trade deficit, and we can pay out debts.
- A happy ending to the current economic recession, 12 February 2008 – The political actions which might end this downturn, and their long-term implications.
- What will America look like after this recession?, 18 March 208 — The recession might change so many things, from the distribution of wealth within the US to the ranking of global powers.
The most important story in this week’s newspapers , 22 May 2008 — How solvent is the US government? They report the facts to us every year.
The World’s biggest mess, 22 August 2008 — A brillant ex pat looks at America from across the ocean.
“The changing balance of global financial power”, by Brad Setser, 22 August 2008
“The Coming US Consumption Bust”, by Nouriel Roubini, 6 September 2008