More than two years after the October 1929 stock market crash and in the depth
of the ensuing depression, a commission originally established by the
Republican-chaired Senate Banking and Currency Committee to prepare the party's
official defense for
the upcoming presidential election finally began in March 1932 to examine the
causes of the market crash and to recommend reforms to prevent future
recurrences.
During the eight months leading up to the November 1932 presidential election,
with an upsurge of populist sentiments caused by two years of severe economic
pain, Democrats predictably criticized the original commission for whitewashing
Republican policy responsibility for causing the financial crisis and in
failing to prevent the market crash from turning into the resultant economic
depression.
The political dynamics in 1932 have similarities with that of the upcoming 2008
presidential election in the aftermath of the credit market crisis that broke
out in August 2007. The main difference between 1932 and 2008 is that, unlike
in 1932, when Democrats could disclaim policy responsibility for the 1929
crash, they cannot deny in 2008 the responsibility of the two-term Bill Clinton
administration (1993-2001) for the credit bubble that burst in 2007. Another
difference is that the full impact of the final bursting of the serial bubbles
will not be fully felt until after the 2008 election. The 1932 election was
held in the midst of a severe depression.
The implosion of Rubinomics
It was Robert Rubin, special economic assistant to Clinton and later Treasury
secretary, who worked out what has come to be known as Rubinomics, the strategy
of dollar hegemony through the promotion of unregulated globalization of
financial markets based on a fiat dollar that also forced deregulation on the
US financial market. (See
US dollar hegemony has got to go, Asia Times Online, April 11, 2002.)
The argument that financial market regulation would reduce US competitiveness
because it would force US financial institutions to relocate overseas had
assumed an air of immaculate logic in the ideological context of neo-liberal
globalization during the Clinton years. That neo-liberal mentality set the
stage for US government abdication of regulatory responsibility over the
financial sector and allowed the free market to move towards the inescapable
path of eventual self-destruction, despite historical experience of the Roaring
Twenties and the New Deal having shown the need for regulation to rein in the
suicidal excesses of financial free markets.
The neo-liberal strategy was set in motion with the help of an
ever-accommodating Federal Reserve to supply more liquidity to foil even the
slightest stock market correction on what Fed chairman Alan Greenspan observed
as "irrational exuberance". Since for almost two decades the finance sector had
grown faster than the real economy, most of the excess liquidity injected by
the Fed went to develop serial debt bubbles that simply got bigger and bigger
each time through financial innovations.
These ever-bigger bubbles were generated by increasingly sophisticated and
complex debt instruments that carried synthetic credit ratings structured in
linked hierarchies of risk exposures and marketed worldwide as "safe"
investments to supposedly nondiscretionary conservative institutional investors
managing the money of clients who normally were not in any position to take
such risks. Such triple-rated "safe" investment-grade instruments were
theoretically protected by a solid base of a large number of dispensable
financial frontline yeomen instruments. The structured finance regime
nevertheless mandates that when enough of the frontline yeomen die, the lords
who depend on a tolerable yeomen survival rate for protection also fall into
jeopardy.
Excessive cash injected into the bubble economy
Through much of the Clinton administration, the Greenspan Fed kept short-term
interest rates too low for too long for a healthy economy, notwithstanding the
alleged safety provided by sophisticated hedging of risks. Towards the end of
the Clinton presidency, an abnormal term structure on interest rates was
created in early 2000 by the Greenspan Fed finally raising short-term Fed Funds
rate targets to fight inflation while the Treasury under Larry Summers was
pushing down long-term rates by buying back 30-year Treasury bonds with funds
from a Federal budget surplus derived from a debt bubble, flooding the market
with excessive cash.
As all market participants know, an inverted rate curve is a classic signal for
recession down the road. Yet silly talk of the "end of the business cycle" was
extravagantly entertained by neo-liberal government economists, along with
silly talk of the "end of history" by neo-conservative superpower strategists.
The so-called "Goldilocks" economy fantasy of not too hot, not too cold, but
just right, was born, along with the superpower fantasy that Goldilocks will
pay for costly foreign wars of moral imperialism around the world without
hurting the domestic economy. Goldilocks was called upon to provide the US with
both guns and butter.
George W Bush won the November 2000 presidential election along with the
bursting of the Clinton debt bubble. The Greenspan Fed again came to the rescue
by turning on the fiat money spigot to fund a housing bubble mistaken as a
miraculous boom, applauded by a grateful Congress overtaken with unquestioning
awe and blind adulation normally reserved only for living gods. (See
The Presidential Election Cycle Theory and the Fed, Asia Times Online,
February 24, 2004).
The policy of moral imperialism brought spectacular terrorist attacks on the US
homeland, forcing the Bush administration, less than nine months in office, to
turn Clinton's foreign war of moral imperialism into a global war on terrorism
that some have estimated will cost up to US$2 trillion or 20% of US gross
domestic product, a cost even a Goldilocks economy cannot afford. The 9/11 2001
terrorist attacks on the US homeland gave the Fed a convenient excuse to flood
the market with massive liquidity. The Goldilocks economy got a new lease on
life from the global war on terrorism, allowing structured finance to blossom
as a regime of global financial terror. The destruction of 9/11 goes pale
against the still-unfolding destruction of the 2007 credit crunch.
Political repercussions of the Great Depression
Back in the 1930s, the Great Depression that followed the 1929 market crash had
direct political repercussions. In the 1930 mid-term elections, the Democrats
gained control of Congress, and in 1932 Democratic candidate Franklin D
Roosevelt was easily elected president over Republican incumbent Herbert
Hoover, carrying over 40 states. The Democrats finally gained control of both
Congress and the Executive Branch after more than a decade of Republican rule.
The new Democratic chairman of the Senate Banking and Currency Committee,
Senator Duncan U Fletcher of Florida, immediately dismissed the Republican
general counsel of the commission on the 1929 crash and appointed as
replacement Ferdinand Pecora, an assistant district attorney for New York.
Known thereafter as the Pecora Commission, its new investigation after 1930
revealed a host of conflicts of interest in the financial sector in the years
leading up to the 1929 crash, such as bank underwriting of unsound securities
to save near non-performing bank loans, rampant insider trading and "pool
operations" by speculators banding together to move a stock and to close out
the pool at a peak price for profit, leaving the manipulated public with
subsequent losses.
More shocking still, the Pecora Commission uncovered the embarrassing fact that
JP Morgan and his fellow banking titans not only continued to reap huge profit
from rescuing firms they helped put in distress while the economy fell into
severe depression, but they were also able to avoid paying any income tax in
1931 and 1932 through tax loopholes on paper losses of distressed companies
they acquired. These bankers were in fact buying up a country in economic
distress with their tax deductions.
Revival of populism: the Single Land Tax
The excesses of the Roaring Twenties revived populist calls for reform and even
radical demands for revolutionary systems of taxation. The Robert Schalkenbach
Foundation (RSF) was organized in 1925 to promote public awareness of the
social philosophy and economic reforms advocated by Henry George (1839-1897),
centering around the "single tax on land values" first published in The
Christian Advocate in 1890. The Henry George Foundation of America was formed
in 1926 as a non-profit entity by some of the leading luminaries of the
progressive wing of the Democratic Party in Pittsburgh, Pennsylvania.
According to the RSF web site, "George began with the ethical premise that all
people have an equal right to the use of the earth. From that he concluded that
exclusive private ownership of land (natural resources) creates unwarranted
special privileges. Furthermore, he observed that holding land out of
production drives down [both] real wages and returns to capital equipment [as
distinct from capital per se]. This process is further exacerbated by taxes on
production and income that 1) increase unemployment, 2) discourage productive
investment, and 3) encourage unproductive land speculation and rent-seeking. To
counteract this self-destructive system, George advocated shifting taxes from
labor and capital onto the value of land and natural resources."
Riding on a wave of populism, George ran, though unsuccessfully, twice for
mayor of New York, the first time in 1886 when he came in second ahead of a
young Theodore Roosevelt. George died in the midst of his second run in 1897,
aged 64. Between elections, he traveled the world promoting his vision of
economic justice, influencing many reformers. In pre-revolution Russia,
George's ideas were popularized by Leo Tolstoy, and in China by Sun Yat Sen,
the leader of the revolution that overthrew in 1911 the 267-year-old Qing
dynasty. George's grand daughter was the celebrated American choreographer
Agnes George de Mille.
The 1920s were a time of revival for 1860s socio-economic Darwinism manifesting
itself through laissez-faire market capitalism which condones no-holds-barred
competitiveness not just for economic growth but for corporate survival. It
denied the early American communal spirit of cooperation. Big business adopted
the "survival of the fittest" theme of English sociologist Herbert Spencer and
Yale professor William Graham Sumner with self-righteous morality. Yet survival
of the fittest among the animal kingdom is practiced only between species,
while intra-specie cooperation is the general law. The symbiotic
interdependence of different species is well recognized in all ecological
systems. Moreover, the laissez-faire market system is far from a natural
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