Finance, History and Politics; What the Candidates Don't Know and Won't Tell You

The Washington Times (Washington, DC), September 17, 2008 | Go to article overview

Finance, History and Politics; What the Candidates Don't Know and Won't Tell You


Byline: Tony Blankley, SPECIAL TO THE WASHINGTON TIMES

As of this Monday, United States Federal Reserve and Treasury Department policies have entered the presidential electoral political debate. While, as a rule, I am in favor of candidates for high office discussing policy, I am inclined to want to make an exception for these arcane, yet vital, policy zones. Not only do none of the four candidates know much about federal reserve policies, but even their advisors may not be amongst the very few experts in this arcane area.

But worst of all, the ambiguities and subtleties of such delicate financial crises management decision-making are singularly unable to be comprehended by slogans and phrases.

And yet, both the Obama and McCain campaigns jumped out of the box on Monday with the assertions that they didn't want a tax-payer funded bailout, and they both called for comprehensive and tighter new financial regulations. I think I would rather have the candidates lying about each other's character flaws than discuss Fed policy in public. I certainly don't claim expertise, but let me point out a little bit of the history of the confusion.

Let's go back for a moment to the alleged historic mother lode of hard-learned Fed policy wisdom - the Stock market crash of 1929 and the following Great Depression. Initially, in late 1929 and early 1930 the Federal Reserve did make major purchases of securities and cut the interest rate from 6 percent to 4 percent.

But by not bailing out banks in the three great runs on banks of late 1930, spring 1931 and March 1933 (resulting in 10,000 banks going out of business), Treasury Secretary Andrew Mellon's famous (though not strictly followed) advice, liquidate labor, liquidate stocks, liquidate real estate became the prime example to history of what not to do during a financial panic.

And indeed, the lesson learned from those events has been that the Fed should make sure banks have enough reserves to cover deposits. Quick and sustained intervention has been the rule.

But if one listens carefully to the public comments of the last few months, one hears praise for at least the echo of an allegedly cold-hearted Mr. Mellon. As Treasury Secretary Hank Paulson said just this Monday: Moral hazard is something I don't take lightly. This currently very popular proposition correctly observes that in free markets, investors who take undue risk must pay - and be seen to pay - the price for such improvidence. …

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