THE BEAR'S
LAIR Booby-trapping the
economy By Martin Hutchinson
The powers of the presidency may wane as
the president becomes more and more of a lame
duck, but in the last year of his time in office
even the most unpopular and powerless president
has one ability remaining: he can booby-trap the
economy for his successor. In American history,
there are a number of examples of this.
The first was probably accidental, since
Andrew Jackson was an economic illiterate and his
successor was his hand-picked favorite.
Nevertheless, in 1836 Jackson booby-trapped the
economy very successfully for Martin Van Buren by
withdrawing the charter of the Second Bank of the
United States. This caused
money
supply to collapse.
Since there was very
little gold in the United States at that time, and
no federal note issue, Second Bank notes were the
only currency with nationwide acceptance.
Consequently, when Second Bank was shut down,
trade between Pennsylvania and Mississippi was
only possible on the basis of local Pennsylvania
or Mississippi bank paper, each of which traded at
a substantial discount in the other state.
Effectively, the United States had lost
its common currency. Not surprisingly, a grinding
six-year recession followed, at the nadir of which
in 1841 no fewer than eight states defaulted on
their bonds, the last state defaults in US
history. Only the California gold finds of 1849
restored the US monetary system to its usual
liquid state. Abraham Lincoln's partisans
often accused James Buchanan of booby-trapping the
Union for Lincoln's accession to office, but they
could not accuse him similarly on the economy,
which was thriving in 1861 after a short but nasty
recession in 1857.
The next booby-trap
therefore, a somewhat more premeditated one, was
that of Benjamin Harrison for Grover Cleveland in
1893. Harrison and the "billion dollar Congress"
had both raised tariffs sharply by the McKinley
Tariff of 1890 and spent the accumulated Federal
surplus. Consequently Cleveland in 1893-97 was
confronted both with a deep recession immediately
and with a serious Federal budget and funding
crisis in 1895, which he was compelled to call in
JP Morgan to fix, an act that struck at the very
foundations of Democrat ideology even then.
Herbert Hoover and his apologists later
accused Calvin Coolidge of booby-trapping the
economy for him in 1929, but there is no truth to
this. The US economy was in excellent shape in
March 1929, with only a speculative stock market
froth causing concern. While a stock market crash
was pretty well inevitable, Hoover caused the
Great Depression almost single-handedly by raising
tariffs though the notorious Smoot-Hawley Tariff
of 1930 and then raising taxes, the top marginal
rate from 25% to 63%, after the depression had
reached full force. (The Federal Reserve also had
a hand in it, by allowing the money supply to
contract through bank failures.)
Hoover
thus left Franklin Roosevelt with the opposite of
a booby-trap situation; FDR only had to avoid
economic policy as catastrophic as Hoover's and
the economy would recover on its own. FDR cleared
this very low hurdle, but only just. The NRA
protected monopolists and damaged the price
mechanism, the Wagner Act hugely increased costs
in heavy industry, the prohibition of the Gold
Clause wrecked security of contract and the
Securities Act of 1933 de-capitalized the
brokerage industry, leading to a capital-raising
dearth that lasted a decade. As I said, better
than Hoover, but not by much.
Lyndon
Johnson undoubtedly booby-trapped the economy for
Richard Nixon in 1969, although given his
pathological nature he may have wanted his
faithful but despised vice president Hubert
Humphrey to inherit the mess. Johnson ran the
economy at full tilt, raising government spending
at a hair-raising rate to fund both the Vietnam
war and his expensive social programs, then raised
taxes by 10% in his last year. The result was a
very unpleasant recession in 1969-70, combined
with an ongoing inflation problem that took a
decade to fix. Nixon was no great economic
thinker, but Nixonomics would have been remembered
more fondly if he had not been forced to clear up
Johnson's mess.
Johnson's legacy
demonstrates a key feature of a successful
economic booby-trapping: the outgoing president's
responsibility for hard times must be apparent
only to dedicated economic mavens, so that to the
general public the difficulties that appear with
the new administration seem to be caused solely by
the new president's own incompetence. William
McChesney Martin, chairman of the Fed, was only
too well aware of Johnson's responsibility for the
inflationary mess of the 1970s, as he set out in
his memoirs, but the great majority of the public
blamed the difficulties on Nixon, and later on
Gerald Ford and Jimmy Carter, seeing Johnson's
years as the last period of real prosperity before
problems descended.
After this survey of
200 years of chicanery, we come to the present, or
at least the recent past. Unlike Andrew Jackson,
Bill Clinton was highly economically literate, and
there can be little doubt that he viewed with
great pleasure the 1998-2000 manic phase of the
dot-com bubble, realizing that his successor would
have to deal with the inevitable following
recession. (Like Johnson, his personality has
elements of the pathological; he may well have
relished leaving this poisoned legacy to his
pompous and self-satisfied vice president Al Gore
rather than to the Republicans.)
Purists
might suggest that the stock market crash was
timed a little early, since the first really bad
month was November 2000, while Clinton was still
in office, but Clintonites would no doubt claim
that even the prospect of replacing their beloved
master with George W Bush was enough to spook
traders.
Bush however, while no economic
genius, was well endowed with low cunning - he
shared with Clinton the facility of being far more
successful in arranging short-term successes and
public relations triumphs than in providing a
sound long-term future for the American people.
Instead of just accepting the recession he had
been endowed with, he cut taxes aggressively,
following one substantial cut with a second cut
targeted at reviving the stock market. He also
persuaded Fed chairman Alan Greenspan to slash
interest rates far beyond the level that would
have been considered appropriate at any earlier
time.
Bush was lucky, too - his period of
economic stimulus coincided with the peak of the
Internet-led reshaping of the world economy,
allowing low-wage manufacturing centers to supply
goods at a fraction of the cost of Western sources
and thereby quelling inflation. Thus the normal
effect of such aggressive money creation, a surge
in inflation, was slow to appear and concentrated
itself largely in the overheated housing market.
As a political survivor of economic booby-traps,
Bush deserves high marks, whatever his failings as
long-term steward of the US economy.
As a
designer of booby-traps for his successor, Bush
appears currently to deserve no more than a B.
Having successfully combined excessively low
interest rates with high budget deficits without
causing inflation, Bush could regret that the
inevitable credit crunch appeared in August 2007
rather than a year later. The emergency rate cuts
by Ben Bernanke, from 5.25% to 3% for the Federal
Funds rate, at a time when inflation is well over
4% even on the fudged official statistics, have
managed so far to stage off disaster in the form
of a deep recession and any more than a mild stock
market downturn.
If Bush were due to leave
office next week, he could regard himself as a
remarkably successful booby trap designer. The
economy would stagger on for only a few months at
most, then fall prey to the triple whammy of a
worsening housing downturn, an unavoidable credit
crunch and rapidly increasing inflation. This
would cause huge economic pain and a deep
recession, but it would all be satisfactorily
within the new president's term, and Bush would be
absolved from blame, except by economic historians
who have few votes. How satisfying it would be to
have the messianic Barack Obama blamed for the
economic misdeeds of his two feckless baby-boomer
predecessors!
However, it seems unlikely
that disaster can be completely postponed as long
as January 2009. Bernanke is beginning to run out
of room to cut rates further - as was remarked in
2003-04, 1% is pretty well the lowest feasible
level for the Federal Funds rate; below that level
money market funds start going bust. Long-term
interest rates have stopped reacting to the
Federal Funds rate and have started creeping back
up, with the 10-year Treasury bond yielding around
3.8% today compared with 3.3% a month ago.
Each month's inflation numbers run the
risk of cracking the market - it survived
January's unexpectedly high Consumer Price Index
figure, but will not survive many more such. The
economy and the market may well survive the summer
of 2008, but a crash in September would still be
four months before the change in administration,
while Bush was still clearly in charge and
expected to do something about it. Thus even if
the worst effects of recession occurred under the
next president, Bush is unlikely to escape blame
from the populace as a whole.
It is to be
hoped that the forthcoming recession clears the
excesses out of the US economic system, so that
the new president of 2013 at worst gets the
inheritance of Franklin Roosevelt rather than yet
another booby-trap to defuse. That requires 2009's
president not to find a way of dodging the
booby-trap, as Bush did, but instead to engage in
the politically highly unpleasant work of cutting
the budget deficit, raising interest rates to
quell inflation and restore saving and eliminating
the US balance of payments deficit. Fortunately,
if we cannot rely on the next president's
integrity, we should at least be able to rely on
him lacking sufficient economic skill to avoid the
fate that is in store.
Martin
Hutchinson is the author of Great
Conservatives (Academica Press, 2005) - details
can be found at www.greatconservatives.com.
(Republished with permission from
PrudentBear.com . Copyright 2005-07 David W Tice
& Associates.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
