Saturday, March 15, 2008

Bear Stearns and the Federal Reserve's "Fiscal Policy"

by Norman Markowitz

There is an important article by Floyd Norris in today's New York Times business section. The article, titled "FDR's Safety Net Gets A Big Stretch," makes the point that the U.S government's bailout of Bear Stearns has a connection to Franklin Roosevelt's "bank holiday" at the beginning of the New Deal, which played a significant role in the saving the collapsing banking system. That "bailout" was connected to significant regulatory reforms over the next few years, including the separation of commercial and investment banking, a substantial strengthening of the Federal Reserve's regulatory role, the creation of the Securities and Exchange Commission, and of course, the Federal Deposit Insurance Corporation to protect depositors. Also banks which were really in collapse were allowed to go out of business (those which had a reasonable chance were saved by government guarantees).

While Norris does not as he should have go into the specifics of the New Deal program, he makes the very important point that Bear Stearns is "emblematic" of a banking system since the Reagan presidency which permits banks to largely ignore New Deal regulation New Deal regulation sought to keep commercial banks from engaging in the speculative activity which had produced disaster. Instead, the Anti-New policies which stemmed from the Reagan era courted disaster on the principle that opening up the market to investment was "spreading risk," or as former Federal Reserve Chair Alan Greenspan is quoted as having said, transferring risk to "stable American and international institutions" (a bit like Herbert Hoover's depression refrain, "the economy is fundamentally sound").

Norris makes the point that Greenspan was very wrong. He also, without going into specifics, suggests that "uniform rules" and more regulation (the sources he quotes stop short at saying reregulation).

Although Norris has presented the kind of valuable information for citizens which rarely appears in either in his newspaper or in news media generally, I would make a few points that are quite different from his.

First the term "safety net" was associated with providing protection in the form of jobs for the unemployed, pensions for retirees, minimum wages for low income workers, public assistance for those unable to work. Rescuing banks and corporations through government direct aid was in effect the government side of the trickle down theory, which the early New Deal continued until peoples movements led by labor and the left, particularly the CPUSA which played the central role in coordinating those movements, pressured the administration to support policies that did produce a "safety net" for the people.

Also, the New Deal's early bailouts of banks, corporations, and large farmers were connected to regulatory reforms and some protections for the people, like the right of workers to form unions under the National Recovery Administration regulatory codes, which the banks and corporations evaded as long as they could get away with it. Norris's article hints at a revival of regulation, but without major political changes, that is wishful thinking. Certainly no one in authority has been has been coming forward with plans to end nearly thirty years of deregulation.

We should also remember that there was no attempt at regulation in response to the depression until the New Deal came to power. While the Hoover administration used the new Reconstruction Finance Corporation to "bail out" those banks and companies that it could, it made no demands of them. In his last months in power, Hoover did absolutely nothing while the banking system went into general collapse and unemployment by his own government's statistics reached 25% (labor Research Associates, representing a left labor position, put the number at close to 38%, since the administration was hugely under counting the unemployed by declaring street apple sellers and anyone else doing anything to make a dollar as "employed"). American capitalism's position then, as now was "give me everything and ask nothing in return." Before the depression it had governments which happily complied with that policy as it has had since the beginning of the Reagan presidency.

Another point which has been lost sight of it the media commentary on the Bear Stearns bailout is any analysis the "partnership" that the Federal Reserve has established with J.P, Morgan Chase. Morgan will borrow the funds from the Fed and lend it to Bear Stearns, which may be be able to survive or be taken over by another financial institution here or abroad. The risk will be borne by the Fed and the taxpayers and Morgan Chase will be able to profit from the "partnership" whichever way it is resolved.

In 1895, in the midst of a depression, old J.P. Morgan led a Syndicate of bankers to finance the government's gold purchases and save the Treasury's Gold Reserves. In a world without any regulation of industry or finance, Morgan made a large profit, even though populists, progressives, and much of the general public were outraged at sight of the U.S. government turning to a leading Robber Baron to save it from financial ruin at its and their expense. Although J. P. found himself with less compliant governments in the last years of his life, I am sure he would be smiling at Morgan Chase's involvement in this "bailout." This was the sort of "cooperation" with government that he always sought.

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