History Says We're Fine

The Republicans are clinging to today's John Steele Gordon piece in the WSJ like it was the last lifeboat on the Titanic. The theme? This is just another financial panic we have every 20 years and we'll be fine with a strong central bank! (also it was Thomas Jefferson's fault, the bastard.)

We paid a heavy price for the Jeffersonian aversion to central banking. Without a central bank there was no way to inject liquidity into the banking system to stem a panic. As a result, the panics of the 19th century were far worse here than in Europe and precipitated longer and deeper depressions. In 1907, J.P. Morgan, probably the most powerful private banker who ever lived, acted as the central bank to end the panic that year.

Even Jefferson's political heirs realized after 1907 that what was now the largest economy in the world could not do without a central bank. The Federal Reserve was created in 1913. But, again, they fought to make it weaker rather than stronger. Instead of one central bank, they created 12 separate banks located across the country and only weakly coordinated.

No small part of the reason that an ordinary recession that began in the spring of 1929 turned into the calamity of the Great Depression was the inability of the Federal Reserve to do its job. It was completely reorganized in 1934 and the U.S. finally had a central bank with the powers it needed to function. That is a principal reason there was no panic for nearly 60 years after 1929 and the crash of 1987 had no lasting effect on the American economy.

Look, even I can figure out the "strong central bank" was the major culprit in this mess. Alan Greenspan's Instant Credit Bubble decimated this country when it exploded in our faces, and it was the efforts to get us out of the recession of 2001-2002 by the same central bank that created this terrible problem, combined with Ben Bernanke's complete inability to do anything about it. I don't need a econ degree to see common sense. And speaking of common sense, here's a guy with a complete friggin lack of it.

In the 1990s interstate banking was finally allowed, creating nationwide banks of unprecedented size. But Congress's attempt to force banks to make home loans to people who had limited creditworthiness, while encouraging Fannie Mae and Freddie Mac to take these dubious loans off their hands so that the banks could make still more of them, created another crisis in the banking system that is now playing out.

While it will be painful, the present crisis will at least provide another opportunity to give this country, finally, a unified banking system of large, diversified, well-capitalized banking institutions that are under the control of a unified and coherent regulatory system free of undue political influence.

First of all, Congress did not force anybody to make loans. The banks made these loans freely because they were making money on them hand over fist by securitizing them and housing prices kept going up. Predatory loans made to people who had to accept usurious rates to get a home AT ALL because of the ridiculously overpriced housing market were the order of the day. Blaming the people who were talked into loans by brokers who made no effort to determine creditworthiness of people in the first place is like blaming the victim of a mugging for being stupid enough to carry cash.

Second of all every step of this crisis was political, with the goal to further the "Bush Boom". Treasury and the Fed were just as politicized as every other department in the Bush Administration, and the cronyism and greed and deregulation was there to make money by making the bubble bigger and bigger and bigger. Purely political, all the way.

It's ludicrous. This is unlike any other panic before because we've never been in such a bad across the board situation, so far in debt, so unable to manufacture our way out of the problem. We should have taken the pain years ago. We didn't. It's literally orders of magnitude worse now.

We're in uncharted waters. Here there be dragons.