Why This Could Be Worse Than The Republican Great Depression
At its core, the problem with the banks today is twofold. First, we don’t make anything anymore. Which means we don’t “create real wealth.” More on that in a minute, but the bottom line is that we don’t have any sort of bottom line – there’s nothing to catch us as we fall, because we don’t have a manufacturing base to fall on like we did in the 1930s.
Second, all our cash is either gone or in a very, very few hands. If the former, we’re really screwed. If the latter, and those people decide their interest trumps that of the nation, we’re also screwed, but probably not quite as badly. It looks, though, like all our cash is gone.
Let’s take these one at a time. The British knew that manufacturing was the core strength of a nation, which is why they forbade the Colonists in 1770 from manufacturing most items that could be imported from Britain, and famously forbade the good people of India from even turning their own cotton into cloth and clothing (those processes had to be done with Indian cotton shipped to England, woven and sewn, then sold back to India as finished clothes).
The colonists of America overthrew the economic tyranny of the British, and in short order (1791) Alexander Hamilton presented to Congress a detailed and specific plan to turn America from an agricultural backwater to a manufacturing giant. We should discourage the import of foreign made products and promote the manufacture of American made goods by taxing imported finished goods (a tax called an “import tariff”). We should encourage the import of foreign raw materials, and the export of finished goods, with low tariffs on these items. We should invest government money – extensively – in infrastructure that would build our monetary and industrial base. We should be protectionist, hard-working, and refuse to cede to anybody our right to make whatever we damn well wanted.
Hamilton was so successful that 100% of the income of the federal government from our founding to the Civil War came from tariffs – and we learned to manufacture just about everything we needed in this country as a result. His policies were continued after the Civil War – tariffs represented two-thirds of all federal revenues from Reconstruction to WWI, and as government exploded in size to fight WWII still represented a third of all federal income.
Import tariffs on manufactured goods averaged – from 1791 until the 1980s – around 35-40 percent. As a result, we made things here. The benefit of “making things” is that you add value more rapidly than is possible in any other way. You get richer – both individually and as a nation – faster than by any other means. Turning a $50 ton of raw cotton into $5 million worth of designer clothing can be done with only a few tens of thousands of dollars worth of labor and a million dollars worth of machinery/factories. Turning a few dollars worth of iron ore into millions of dollars worth of luxury cars is incredibly profitable.
But the Reagan Revolution changed all that. Conservatives didn’t think making things was the most important consideration of an economy – instead the goal should be for “individual incentives” and “greed” to drive companies and individuals to “maximize profits” regardless of the impact on the nation as a whole. Labor was cheaper in China and India, so after a few hundred dollars worth of lobbying and a few cheerleading (but deeply flawed) books like Thomas Friedman’s “Olive Tree and the Lexus,” we dropped our average import tariffs into the realm of 2 to 3 percent, where they remain today.
The result was easily predicted. Most of our manufacturing was shipped overseas, while the profits from the sale of foreign-made goods concentrated in a few hands (think the Walton family and General Electric, the respective companies that first and most proudly drove China and India respectively into our manufacturing and service sectors).
While we didn’t make anything here any more, we still had a lot of cash and other “real assets” – real, physical wealth – left over from the two centuries when we made everything here. The share of that wealth in the hands of the middle class was mostly in the equity in our homes, cars, and pensions/savings.
And so the predators among us turned their sights on these last reservoirs of wealth in America. Phil and Wendy Gramm (he is McCain’s chief economic advisor) pushed through both a deregulation of banks and investment companies, but also a deregulation of how commodities (real things) were traded on margin (using money borrowed against the value of the commodities).
Alan Greenspan enthusiastically jumped into the game, dropping interest rates so low they were below the rate of inflation for the biggest institutional borrowers – giving the Masters Of The Universe all the cash they needed to gamble with, thus driving up the cost (but not the value) of commodities from houses to oil to food.
In the process, the American middle class got into the act by borrowing in a slightly similar fashion, but instead of billions they only borrowed against the value of their houses and cars and the line of credit on their credit cards.
But then we began to run out of wealth – real wealth. Because we didn’t make anything any more, about all we could sell to the world were IOUs, debt-based “instruments” made up of bundled mortgages. And when the world stopped wanting to buy them, looking instead to put their money into real assets like gold or oil or manufacturing plants, it all began to unravel.
The last time things unraveled like this was during the Republican Great Depression of 1929-1938. That, too, had followed a series of Republican administrations that had radically deregulated banking and securities rules, leading to wild speculation and asset bubbles, starting with a real estate explosion in Florida in the early 1920s. That Florida real estate bubble burst in 1927, and by 1929 it had spread to Wall Street. What we are witnessing today is the death of neoliberalism (e.g. Friedman/Greenspan/Thatcher/Reaganomics), although few in the corporate media will call it out.
The recent semi-nationalization of Freddie and Fannie were, in fact, clear demonstrations of the failure of privatization of institutions essential to the commons (a primary purpose of government), but at the time it seemed that none of the corporate media would dare refer to it as such.
Today we're seeing the logical culmination of deregulation; steps recommended by Friedman/Greenspan and started in the last years of the Carter administration, put on steroids by Reagan/Bush/Clinton/Bush, reaching a peak with Phil and Wendy Gramm's rollback in 1999 of Glass-Steagall allowing "investment" companies to behave like "banks" without regulation (making them, in reality, neither, but instead merely financial schemes).
"Roosevelt is dead," Limbaugh famously intoned at the appointment of GW Bush as President, "but his programs remain, and we're in the process of doing something about that, as well." Indeed.
Let's start calling this what it is - the total discrediting of the economic theories of Von Hayek, Milton and Thomas Friedman, Alan Greenspan, and borrow-and-spend Reaganomics/Bushnomics. The failure of "globalization," deregulation, and privatization. And let's begin to honestly identify today's events as a clear and clarion call for a return to the common-sense policies FDR put into place that saved capitalism from itself and its predators (and led to four decades of sustained growth of both the economy and the middle class) three generations earlier.
Now we are again "rediscovering" the lessons of the last Republican Great Depression...and if we don’t QUICKLY begin to move manufacturing capacity back into this country (and have it owned by American companies so the profits don’t just end up in Japan or Germany) we will be, within five years, far worse off than Americans were in 1934.