The U.S. Government’s extraordinary financial support for the "banking system" of the United States raises a question with its genesis in the Great Depression-era.
What role should the government play during an economic crisis?
History has shown us that there are two, overarching answers to the above question, and this diary will discuss the answers and their impact on the nation.
Before delving into the answers to the question posed in the introduction, a review of recent commentary seems apropos.
In Saturday’s New York Times, Bob Herbert’s article, "Far From Over," hones in on the latest jobs report and the impact of lost jobs on the main street economy. The following passage from Herbert’s article seems to capture the essence of our nation’s economic dilemma – banks and Wall Street or jobs and Main Street.
Joblessness is like a cancer in the society. The last thing in the world that you want is for it to metastasize. And that’s what’s happening now. Don’t tell me about the stock market. Don’t tell me about the banks and their perpetual flimflammery. Tell me whether poor and middle-income families can find work. If they can’t, the country’s in trouble.
According to Herbert’s article, this latest jobs report describes the loss of 611,000 private sector jobs (public sector creation of 72,000 jobs for the decennial national census mitigated the severity of the jobs lost to net job losses of almost 540,000 jobs). Additionally, the same report revised upward the job losses for March and February 2009; March’s job losses were raised to 699,000 from 663,000 and February’s job losses were finalized upward to 681,000 from 651,000.
In The Nation, William Greider writes about the need to transform our nation and the meaning of rich. Greider's article, "The Future of the American Dream," offers the following thoughts on improving our society and how government can be an enabler of that change.
What government can do is construct the rules, legal premises and supportive platform that enable people to pursue social transformation more aggressively. Our inventive popular culture--the marvel of the world--does this in freewheeling ways. With a little help and less interference from Washington, Americans can similarly reinvent the society. An era of innovation and random experimentation would draw upon this same spirit, the life force of Americans, the people who are practical and idealistic.
One important condition government can provide is the platform of "essential needs" that will give everyone more security and therefore more confidence to explore new and different choices. We could dust off Roosevelt's "second Bill of Rights" and address its unmet goals. FDR recognized in early 1944 that Americans were weary of the sacrifices imposed by World War II and so he announced a broadly conceived promise. After the war is won, he said, the country must construct a new set of meaningful "rights" for all, everything from health and education to work with remunerative wages. His vision of the future became the postwar political agenda of the Democrats, and in large measure the promises were kept. I think Barack Obama may eventually face a similar necessity to spell out the vision of what a transformed America can become on the other side of the ditch we are in. _____________
Greider’s comments help transport us to this diary’s main objective; a discussion of the dual and competing comprehensive answers to the question of government’s role during an economic crisis.
The government, during an economic crisis, can use its powerful tools in the role of helping a few special interests groups or it can take a broader approach and address the national interest. The choice that President Obama and Congress make regarding government’s role in this crisis will be instrumental to the type of nation that we bequeath to future Americans.
In the 1930s, President Franklin D. Roosevelt had to make a similar choice about government’s role during the Great Depression. President Roosevelt made the choice of supporting the national interest over the narrow interest of financiers and creditors.
A passage from Harold James’ The End of Globalization: Lessons from the Great Depression (Harvard University Press; Cambridge, Massachussetts; 2001) illustrates the importance of Roosevelt’s decision.
The outcome of the U.S. experience of the 1930s was a shift in perceptions about what government should and should not do. It should not protect the private interests of financiers and creditors, and should not make itself vulnerable to private pressures from special producing interests in Congress. It should act to guarantee overall fiscal and monetary stability, and it should set general conditions in which an expansion of U.S. trade might be facilitated. Both of the latter processes proved to be a crucial part of the establishment of a secure framework for the world economy after 1945. The U.S. path was quite distinct from the approach of other major countries. (James, The End of Globalization, 2001)
Protection of the national interest was President Roosevelt's approach during the Great Depression. Notwithstanding the financial losses of the banks and Wall Street because of poor lending practices and the Republican-controlled Congress passing of the Smoot-Hawley Tariff Act, President Roosevelt decided to follow the path that led to government’s role as a protector of the national interest over the interests of financiers, creditors, and special producing interests in Congress.
Presently our government, with its enormous funding of banking and Wall Street interests, seems to be traveling backwards on the road that President Roosevelt mapped out for us. We are spending billions of tax dollars to protect the narrow interest of financiers and creditors. Will the protection of narrow, producing interests be far behind or already here?
The arguments for saving the same mega-banks and Wall Street financial institutions have been made by our leaders, but none of the reasoning seem to hold water. Credit is not flowing and may not sufficiently flow for a very long time. In the mean time job losses continue at a breakneck pace.
To put the icing on the cake, we are now looking at making the Federal Reserve Bank and its governors the regulators of systemic risk. If system risk is defined as the protection of the narrow interest of profligate banks and other financial institutions, then we’ll be just fine with the Fed as the systemic risk regulator; otherwise we might wish to buckle up for a hell of a ride.