The Big Change: Lessons from the Great Depression: Part XXI. Challenging Wall Street, Restoring Economic Confidence, and Dealing with the Biggest Financial Challenge since the Great Depression.
The country has spoken and with a loud and convincing voice. Change is demanded. This historic moment in our history is appreciated on so many levels but once again, the market reminded us very quickly that things are not well on the global economic system. President-elect Obama is going to have many challenges waiting for him once he takes office. It should come as no surprise that 6 out of 10 voters mentioned that the economy was the number one issue on their minds.
In today’s article, we are going to look at the early 1900s which saw Theodore Roosevelt take it to Wall Street and later in the 1930s, Franklin Delano Roosevelt taking it to Wall Street once again. It isn’t surprising that during these rough economic times that leaders that expressed a message of change rose to prominence. After all, does anyone think the status quo is working when the system is setup up to reward crony capitalism and we have now implemented the largest bailout ever seen in our world?
The market once again on Wednesday took a brutal lashing as the ADP jobs report came in with weak numbers. The stresses on Wall Street are fully engaged with the fortunes of those on Main Street. As the capital injections go straight to the banks, not much has changed in terms of lending for the average American. Many banks are simply hoarding the money and if they are lending the money, they are still at high rates. One major failure of the bailout proposal is that it forgets to examine the issue of employment. You can give banks trillions of dollars but without a solid employment base no one is going to qualify for a loan.
Today, we are once again at an economic fork in the road. In all frankness, no one really knows where we are going from here. The so-called experts have been proven wrong over and over and a new system is needed to regulate the absurd greed and financial imprudence that plagued us this last decade.
This is part XX in our Great Depression series:
In this article, we are going to look at Frederick Lewis Allen’s The Big Change which examines the history of the United States from 1900 to 1950. It is an excellent book and another must read for any history buff.
In the first part, we are going to look at the unlikely taking of the White House by Theodore Roosevelt. It is fascinating that Senator McCain a few times on the stump mentioned that Teddy Roosevelt was one of his heroes. President-elect Obama has referenced Franklin Delano Roosevelt’s New Deal many times. The Roosevelt name seems to garner support from both sides in times of economic collapse:
The Biggest Change
“Indeed as Hanna scanned the skies during the last weeks of 1900 there was only one cloud on the horizon: the man chosen by the Republican National Convention as its candidate for Vice-President, the rambunctious Rough Rider of San Juan Hill, the unpredictable young Governor of New York, Theodore Roosevelt. As Governor this Roosevelt was destined to be in the same office a generation later; but he was independent, he wouldn’t stay tethered, and Hanna distrusted him. “Don’t any of you realize,” Hanna had exploded to another senator at the convention, “that there’s only one life between that madman and the Presidency?”
“What White called “the alliance between government and business for the benefit of business” was an honest love affair to Hanna. He felt that if the path were made easy for the great corporation to do as they pleased, the riches which they accumulated would filter down to the less fortunate, and that any attempt to change the rules of the game except to give the great corporations even more opportunity to prosper would open the way to demagoguery, mob rule, and destruction. With others the alliance was not a matter of emotional affinity or of conviction, but of purchase and sale – the prostitution of government bodies for favors of cash. Big corporations advanced their interests not only by making sizable campaign contributions – often to both parties – but also by subsidizing or bribing legislators and even judges.”
This notion that trickle down economics is new is false. As you can clearly see even in the early part of the 1900s this idea of keeping government out of the corporate structure was well entrenched. The same tactics of lobbyist and buying out politicians is nothing new either. The magnitude at the time was even worse. Yet make no mistake about it that this power held onto by this group will not be relinquished easily. In fact, you can expect epic battles against regulations that are surely going to come given the absolute corruption and poor stewardship of Wall Street. Here is how things operated at that time:
“Railroad companies issued free passes to lawmakers, officials, journalists, and their families. At one state capital after another, corporation lobbyists with well-filled pockets were ready to go into action whenever there was a threat of adverse legislation or a hope of favorable legislation. And as for the United States Senate – whose members were at that time elected, not by the people, but by these amenable state legislatures – it had become the chief citadel for the defense of privilege. Most of the Senators were either rich men or carefully selected allies and messenger boys of the rich; they could deliver orotund speeches about the “full dinner pail” for the workman, but their hearts were with the big stockholder.
To quote once more from William Allen White’s autobiography, written long years later:
“Senators elected in the days when machines and the ownership of machines were passing into the hands of a class-conscious, organized plutocracy had no obligations to the people of their state…In Kansas, it was the railroads. In western Massachusetts, it was textiles. In eastern Massachusetts, it was the banks. In New York, it was amalgamated industry. In Montana, it was copper. But the power which developed and controlled any state went to New York for its borrowed capital, and New York controlled the United States Senate…The grade of senators, as far as intelligence went, was higher than the grade which the people selected, but on the whole and by and large it was not a representative government. Only a minority of the people of the United States had any control over the United States Senate. And that minority was interested in its own predatory designs.”
This was the status quo at the time. Boom and bust cycles were extremely common in the early history of our country. As Teddy Roosevelt took office, he was expected to keep the line of hands off philosophy but this was quickly challenged:
“It was not until several months had passed that the first signal flare of the new era went up: in February, 1902, Roosevelt’s attorney general brought suit for dissolution of the Northern Securities Company under the Sherman Antitrust Act.”
“Morgan was dining at home when the news of the suit came to him by telephone. He was dismayed and indignant. He told his guests that he had supposed Roosevelt to be a gentlemen, but a gentlemen would not have sued; rather he would have asked Morgan privately to reorganize or abolish the Northern Securities Company in order to bring it in line with the government’s wishes. The great banker felt that Roosevelt was treating him, an honorable man, like a common crook. Joseph Pulitzer, publisher of the New York World and a foe of the “trusts,” was overjoyed at Roosevelt’s action and wrote in a letter of instructions to his editor, Frank I. Cobb, that the President had “subjugated Wall Street.” This was considerable of an exaggeration; but at least the battle was joined.”
Now you need to remember that at this time, much of the power was centered in Wall Street. It was seen and regarded by many that politicians in D.C. were largely bought off by lobbyist. They were the mouthpiece of Wall Street concerns. JP Morgan who saw himself as a statesman and protector of the Wall Street structure took a big offense when President Roosevelt brought suit to one of his companies. Of course, Roosevelt wanted to make a statement. The fire however did not last long and did not change things radically:
“This battle between the President and the emerging plutocracy, during the next few years, was destined to be an intermittent and often halfhearted one. The reason was not far to seek. Roosevelt was a Republican President. He could not get too far out of step with his party.”
“Little as these people had in common, they were alike in seeing the nation, not as a place where everybody went his own way regardless of the plight of others, but as a place where people had a common destiny, where their fortunes were interlocked, and where wise planning, wise statesmanship could devise new instruments of satisfaction for all men.”
In 1908 President Taft won the election largely on the popularity of Teddy Roosevelt. He had certified him a true “progressive.” Taft served only one term and lost to Woodrow Wilson, the long-jawed, brilliant, energetic ex-professor. The idealism and anger geared toward Wall Street and a consciousness of a growing plutocracy gave much of the momentum toward electing President Wilson. The desire for service and global good lasted for awhile but then subsided and led to the Roaring 20s where greed and conspicuous consumption exploded. Ideals, which once sounded great like the League of Nations were largely symbolic and without no true political capital. The public got greedy and decided to look to Wall Street for direction, again. The life portrayed in the Great Gatsby dominated the Roaring 20s. This massive speculation of course was one part, which led up to the Great Depression. The parallels are striking to our current time. This past decade was one of the biggest greed plagued periods of our history. The idea of service and investing for the greater good went out the window. What was our patriotic duty again? To go out and spend like drugged up hamsters with no other deeper meaning in life.
Living a life like that does have a cost when the piper comes for his due. What happened after the massive global spending orgy? Let us take a look:
“Let us pause for a second to look at some other figures. During that very year of 1929, according to the subsequent estimates of the very careful and conservative Brookings Institution, only 2.3 per cent of American families had incomes of over $10,000 a year. Only 8 per cent had incomes of over $5,000. No less than 71 per cent had incomes of less than $2,500. Some 60 per cent had incomes of less than $2,000. More than 42 per cent had incomes of less than $1,500. And more than 21 per cent had incomes of less than $1,000 a year.
At 1929 prices, said the Brookings economists, a family income of $2,000 may be regarded as sufficient to supply only basic necessities. One might reasonably interpret this statement to mean that any income below that level represented poverty. Practically 60 per cent of American families were below it – in the golden year of 1929! The Brookings economist added another cautious observation: There has been a tendency, at least during the last decade or so, for the inequality in the distribution of income to be accentuated.”
In no other time in history has there been such a wide disparity in income. The United States in terms of income equality ranks very high on the list. According to the Gini coefficient a measure of a country’s income inequality, only a couple of nations have a higher income inequality than the U.S.:
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This disparity has only increased since the 1950s. The problem with this divergence is that many of the high paying jobs on Wall Street absolutely robbed Main Street America while they sat behind mahogany desks counting their ill-gotten profits. Once again excessive greed will bring them down like previous times in history. Let us look at the household income breakdown in the United States:
Only 1.5% of all American households even make more than $250,000 a year. 90% of Americans are certain to do better under the Obama tax plan because look above, 90% of households make less than $118,200. And those that fall between $166,200 and $250,000 is only 3.38% and this area will see either a minor gain or no gain at all. This I think is where the campaign had to readjust some of their numbers. That is why the mincing of words between 90% and 95% has gotten a few confused. Bottom line:
90% will do better under the new plan.
3.38% will stay the same between both plans
6.62% would have done better under the Republican plan
To a certain extent, I think most people can understand that. And for the most part I don’t think people have a problem with someone making a profit. What people do have a problem with is when someone makes an outrageous profit creating something that hurts the fundamentals of our economy and comes at the cost of the majority. In this case, CEOs get big compensation checks and we are left bailing out a smoldering pile of junk. You don’t see the public yelling that the CEO of Google is getting paid well. Why? Generally speaking they are producing something that is beneficial to society. Even athletes with outrageous salaries produce a sense of joy when they are on your team and fans have the choice to watch or stay home.
In the case of the financial industry, we had no choice. The prudent Americans were forced into this upside down vortex and by design, they made it hard for anyone to peer in so we really have no idea how bad things are. We have yet to really examine the credit default swap market. Should another major institution go under, we will have a very hard time coping.
Let us reflect on the median income for a family in the United States. That number is $46,326. 50% of Americans make this or less for their entire household. This works out to be about $3,000 a month after taxes. In California, half will probably go into your rent for a modest apartment. Food? Healthcare? Utilities? It adds up quickly. A family with a child and this median income is literally making it tough to live.
We’ve been talking about this for a very long time. This silent depression. A sense that we were inches away from falling into an abyss. The cohesion was debt and more debt. Finally in September and October, the markets literally came unhinged and went on an 8 day prolonged crash.
October is not a good time historically:
“On the morning of October 24, 1929, the towering structure of American prosperity cracked wide open. For many days the prices of stocks on the New York Stock Exchange had been sliding faster and faster downhill; that morning they broke in a wild panic. The leading bankers of New York met at the House of Morgan to form a buying pool to support the market; Richard Whitney, brother of a leading Morgan partner, thereupon crossed the street to the great hall of the Stock Exchange and put in orders to buy United States Steel at 205; and for a time prices rallied. Pierpont Morgan had halted the Panic of 1907. Surely this panic, too, would yield to the organized confidence of the great men of the world of finance.
But within days it was clear that they cold no more stop the flood of selling than Dame Partington could sweep back the Atlantic Ocean. On it went, session after session. On the worst day, October 29, over sixteen million shares of stock were thrown on the market by frantic sellers. And it was not until November 13 that order was restored.
In the course of a few weeks, thirty billion dollars in paper values had vanished into thin air – an amount of money larger than the national debt at that time. The whole credit structure of the American economy had been shaken more severely than anybody then dared guess. The legend of Wall Street leadership had been punctured. And the Great Depression was on its way.”
It is hard to put a number on how much equity evaporated in this crash. Russia came unglued. Iceland went bankrupt. The U.S. Dow is still down 35% from the peak. It is estimated globally that $29.6 trillion in equity was lost. For perspective, the United States GDP is roughly $14 trillion. So globally in this timeframe we lost essentially 2 full years of U.S. GDP. That is shocking. That is the problem with global bubbles. It was clear to any objective observer what was going on. The problem was who is the one to intervene when the punchbowl is being passed around? Someone has to be the adult.
Let us now discuss 6 characteristics of the Great Depression:
“1. It was a collapse of terrifying proportions and duration. At the middle of the year 1932 – more than two and a half years after the crash of 1929 – American industry as a whole was operating at less than half its maximum 1929 volume. During this year 1932, the total amount of money paid out in wages was 60 per cent less than in 1929. The total of dividends was 57 per cent less; and these dividends represented the earnings of the more fortunate concerns – some might say the more ruthless toward their employees – while American business as a whole was running at a net loss of over five billion dollars.”
We are also on the verge of this. Jobs are being lost. When people look for new work it is very likely their new pay is much lower than their previous job. Think of a real estate agent now looking for work elsewhere. Or a financial worker now out searching for work. The data may not reflect a reduction in their current field but they are now being paid a lot less. Governments are going to be in for a rude awakening come 2009 when they realize how pathetic 2008 is.
California is calling a special session because an expected $3 billion short fall is now looking like a $10 billion short fall. Whoops! When have we heard this story?
“2. The Great Depression was part of a world-wide collapse: what Karl Polanyi has aptly characterized as the collapse of the market economy that had been established during the nineteenth century.”
Decoupling is a myth. September and October have proven that. The Nikkei hit a 26 year low. The Hang Seng has fallen off a cliff. U.S. markets are down nearly 40%. Iceland is essentially done with their market being down almost 80%. Russia? They halted trading on multiple occasions. Latin America is quickly catching the U.S. Europe? Turns out they have a bubble even bigger than our own in certain areas! This is also a global collapse just like then.
“3. It marked millions of people – inwardly – for the rest of their lives. Not only because they or their friends lost jobs, saw careers broken, had to change their whole way of living, were gnawed at by a constant lurking fear of worse things yet, and in all too many cases actually went hungry; but because what was happening to them seemed without rhyme or reason.
Even if they tried to hide their dismay, their children sensed it and were marked by it. The editors of Fortune wrote in 1936: “The present-day college generation is fatalistic…it will not stick its neck out. It keeps its pants buttoned, its chin up, and its mouth shut. If we take the mean average to be the truth, it is a cautious, subdued, unadventurous generation…” As time went on there was a continuing disposition among Americans old and young to look with a cynical eye upon the old Horatio Alger formula for success; to be dubious about taking chances for ambition’s sake; to look with a favorable eye upon a safe if unadventurous job, social insurance plans, pension plans. They had learned from bitter experience to crave security.”
This certainly is the crisis that will mark my generation. Forever I will hold a critical eye to Wall Street. No longer will I view banks as completely safe investments. I am positive that many have this feeling. Things in the past decade have gotten so out of control. It is interesting to note that looking at college occupation fields like accounting and nursing are getting strong interest because of the safety inherent in those fields. It is also the case that companies are still hiring in these fields. I read an article talking about business schools and how students are retooling away from that brass ring at a coveted i-Bank. What i-Bank are you going to work at? Forever this generation will remember this economic collapse. Remember that the peak of unemployment during the Great Depression came 3 years after the crash.
“4. The Great Depression brought the abdication of Wall Street from the commanding position which it had achieved in the late nineteenth century, had consolidated under the personal leadership of Pierpont Morgan, and had institutionalized since his death in 1913. Not only had the big bankers of 1929 failed to stop the Panic, but as time went on the inability of financiers generally to cope with the down trend, their loss of confidence in their own economic convictions, and the downfall of the banking system itself all advertised helplessness.”
Once again we are going to see a shift of power to Washington D.C. This election demonstrates that that majority of the population wants and is open to:
(a) Government intervention in healthcare
(b) Tax cuts for 90+% of the U.S. population and tax hikes for those at higher brackets
(c) Regulation of Wall Street (done by the government)
(d) Energy programs with intervention by the government
So once again the throne of power will slowly shift from Wall Street to D.C. Make no mistake that the crony capitalistic model is not going to relinquish power easily.
“5. The Depression sharply lowered the prestige of businessmen. The worst sufferers were the bankers and brokers, who found themselves translated from objects of veneration into objects of public derision and distrust – the distrust being sharply increased by the evidences of financial skullduggery which came out in successive congressional investigations. But even business executives in general sank in the public regard to a point from which it would take them a long time to recover; and it this decline the conscientious and public-spirited suffered along with the predatory.”
Let us do a mental Rorschach test. When I say real estate agent, what comes to mind? When I say mortgage broker, what do you see? Countrywide, IndyMac, and Bear Stearns. Wall Street. Investment bankers. What comes to mind? This is the fall from grace for the finance industry. For an entire generation many Americans will not revere this field. Regulations which are coming down the pipeline will destroy any major profits. People will do well but not like they once did. The prestige is gone for a very long time. And just wait until the echoes of the crash spread even deeper into America. This will be no minor recession. This is the real deal here.
“6. Yet the world-wide Depression – though it brought Hitler to power in Germany, and in many other lands seemed to have sounded the death knell of capitalism – brought to the United States nothing approaching a revolution. It brought an epidemic of proposals for economic panaceas – the cult of technocracy, Upton Sinclair’s EPIC, the Townsend Old Age Revolving Pensions Plan, and suchlike; it brought the dictatorlike Huey Long to brief regional power; it brought riots at farmers’ bankruptcy sales, a Communist-led “march” on Washington, and the briefly ominous Bonus Army march of 1932.”
This isn’t the end of capitalism. We’ve never been in a full capitalistic system anyways. Look at Social Security, Medicare, education, defense spending, and other areas where the government is involved. We’ve been operating under a quasi-free market system. Yet for the past decade we have left the finance industry run amok and put the entire global system at peril. Now, we are left bailing them out but this bailout comes with many strings attached. Government regulation is going to put some much needed breaks. Just remember this a few years down the road when things start to slowly get better and you start hearing the neo-cronies asking for deregulation. It took 66 years for the Glass-Steagall Act of 1933 to be repealed. We have yet to implement our own and new version of this. I want to leave you with a paragraph talking about Teddy Roosevelt and FDR:
“The long-standing political coolness between the Oyster Bay Roosevelts and the Hyde Park Roosevelts should not blind us to the striking parallels between the approach to public affairs of Franklin Delano Roosevelt and of his wife’s uncle Theodore Roosevelt. Both men had wealth. Both championed the underdog out of conviction, though they were upperdogs themselves. Both were men of abounding energy and captivating charm, though Theodore’s was the more rugged, Franklin’s the more gracious. Both were exuberantly interested in people, people of all sorts and conditions. Neither had a systemic economic philosophy; both, in devising their policies and programs, played by ear; and both though of economic problems as essentially moral problems. Each, in his own time, was curiously fitted to bring change without the ideology or the violence of revolution.”
Economically speaking, we really have to come together because if history is any indication, this is going to be a brutal down turn. One thing is certain and that is doing things via the status quo is no longer a choice. The employment numbers coming out on Friday are going to be stunning and not in a supermodel kind of way either.
We are now going to be forced to put practice into theory. Ben Bernanke a true monetarist from the Friedman school of thought has had a chance to test his Great Depression knowledge. Unfortunately he missed the one aspect of the Great Depression that it was global and we only have control over one aspect of the system. The only way a vision he desires will come to is if the entire global community united under one solid front. That is not going to happen. This is going to be a very challenging road ahead. Whatever does happen, a big change is going to occur.
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