The Hobgoblin of Little Minds

September 21st, 2011 at 10:29 am David Frum | 33 Comments |

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At the end of the 1980s, the US was hit by a severe financial shock: the Savings & Loan crisis. I’ll spare you the antique details of the crisis, but in 1990 the US found itself looking at perhaps $200 billion in federally insured bad loans by the failed S&L industry. The economy slipped into a recession, nothing like so severe as the present-day recession, but bad enough.

Soon afterward, Saddam Hussein invaded Kuwait, shocking global oil prices.

Responding to the crisis, the Federal Reserve rapidly and repeatedly lowered interest rates. It cut the Federal Funds rate 18 times between 1990 and 1992, reducing it from 8% to 3%. These bold monetary actions failed however to produce recovery on a timetable to gain re-election for President George HW Bush.

I was working at the Wall Street Journal at the time, and I well remember the mood of anxiety about monetary policy. The Journal ran a series of editorials under the header, “Victorian Finance,” upbraiding federal monetary authorities for not doing more to ease credit. (I erroneously tweeted this morning that the WSJ was annoyed that rates were going up. Checking the record, I see that the irritation was instead that banking authorities were tightening capital requirements in a way that squeezed credit despite the lower rates.)

I can’t find the full text of the original classic “Victorian Finance” editorial online. But some scattered quotations gleaned from online sources give the flavor:

The Victorians were peopIe, you recall, who upon discovering the little secret of sex, thought the human race was about to vanish. Likewise, our modern Financial Victorians have discovered the little secret of credit. … [W]orries about ‘too much leverage’ or ‘too little capital’ creep out of heavily curtained conference rooms and into daily conversations.

And here’s a transcript of an interview with then-Journal editorial Bob Bartley from the spring of 1992.

I think that they [the federal banking authorities] should be tougher, I guess, in the way they handle banks, that they should be willing to take a few more risks, let the banks take a few more risks than they, they seem to have been willing to, so that new enterprises coming along can get some, get some credit. That is finance in order to build the facilities and build the new businesses.

Question: if conservative journalists could write so feelingly about the need to inject credit during the downturn of 1990-1991, how is that they have arrived at exactly the opposite policy conclusions during the much more severe downturn and deleveraging of 2009-2011? The need for monetary ease seems even greater this time than last – and yet the policy recommendation has been utterly reversed. What’s changed?

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33 Comments so far ↓

  • D Furlano

    Its called ideology. It does not have to make sense nor does it have to be consistent.

    It just is.

  • more5600

    A black man in the White House, that is what has changed.

  • Solo4114

    Because they aren’t journalists. They’re shills for their corporate masters.

  • beleg

    The obvious, cynical answer is that last time they were trying to save a president, this time they are trying to sink one. I generally avoid such extreme cynicism, but in this case I just don’t see any other credible answers.

  • jamesj

    “The need for monetary ease seems even greater this time than last – and yet the policy recommendation has been utterly reversed. What’s changed?”

    The answer is of course obvious, but it is worth spelling out. The Republican party no longer seems to support a specific and coherent philosophy. They no longer necessarily support small government, reducing the national debt, cutting taxes, strong national security, using prevailing economic theory to forge fiscal policy, or any other specific policy stance we might be used to associating with the party. Their actions and stated positions over the last two decades have become incoherent, flipping back and forth between opposite positions with ease. The guiding principle now seems to be to stake out whatever position is the opposite of your current political opponent’s, no matter how sensible and how traditionally Conservative your opponent’s position may be. Even when your opponent proposes an idea you authored years ago, oppose it. Pretend you didn’t once support it. This cynical strategy rises to great heights, even to the level of opposing the idea of national unity and national progress when those universal, benign and agreeable notions are proposed by political opponents. For goodness sake, Republicans even oppose public health these days. Let’s NOT feed our children healthy food in schools. That’s for terrorists.

    This is not good for the country. There are two ways out. One option is for voters to see through this incoherent sham and vote for sensible alternatives. Sadly, we’re not seeing that. I could theorize at length on why that is, but the cause of this behavior by voters is beside the point. We’re in the mess we’re in and we need a way out. The second option is for statesmen, actual patriotic statesmen with access to power, to stand up for what they know is right despite the current trend and the general malaise among the voting public. We’re obviously not seeing that to a great degree either. I see no prospect for major improvement on either front any time soon.

    • larocquj


    • hlsmlane


    • Traveler

      Great post. But I want to focus on your second para. I can understand the “leaders” being nothing but shills for their paymasters, but why is the electorate so messed up as to buy this?

      I think it has to do with a decline in education in all fields, combined with a service economy that paid most of us more than what we actually produced ever since the 80′s. So when the service economy bubble finally exploded, it left an electorate with little to no understanding of economics, let alone what to do about solving problems. Instead, we have a dichotomy between the “I got mine” and the rest of the “socialists”. My two cents. I am sure others can build a far more nuanced explanation and I look forward to reading them.

  • Redrabbit

    One element is this…

    Quite simply, as we have all seen, the far right has gained prominence in the GOP. For a long time, the hard-money, Ron Paul types have been railing against the Fed over this and that. They were a fringe minority in 1987-1992, the days of S and L and the aftermath of the Gulf War. No one really took them seriously, and my impression is that BOTH parties considered the conspiratorial, anti-fed types to be only a slight step up from people who thought there were aliens hidden in underground air force bases.

    No more.

    The conspiracy theorists and anti-fed loonies are now ascendant in the GOP.

  • Rob_654

    “What’s changed?”

    We have a black President that the Republicans hate and will do anything to drive from office in 2012 because they view him as illegitimate to hold the office.

    The Republicans will continue to sacrifice the middle class in this country in order to try and beat Obama regardless of the amount of pain suffered by the middle class as long as the wealthy don’t get hurt because they are all that the Republicans care about.

    The Republicans have been waging Class Warfare against the middle class for decades – they are now just so obvious about it that even the spineless Democrats are starting to say “Bring it On!” when the Republicans start their talking points about “Class Warfare”.

  • PestiEsti

    Republicans and the WSJ still oppose higher capital requirements for banks. The GOP will always oppose bank regulation. Sometimes they make their argument by citing increased access to credit, but they see it as a separate issue from monetary policy.

  • dante

    I’ve asked the same question with regards to taxes.. How can you advocate tax cuts when the economy is booming and tax revenue is at an all time high (2001) as well as when we’re in a recession and tax revenue is low (currently)… I’ve yet to get an answer.

  • jimbob54

    What’s changed? Uh, how about unsustainable debt, unsustainable deficits, unsustainable entitlement obligations, totally prohibitive environmental regulations and red tape, and a workforce that no longer has the skills or the inclination to compete with Brazil, Russia, India, China, and other red-hot emerging economies.

    Not to mention a much higher ratio of wealth-destroying government workers to wealth-creating private sector workers, a ridiculously high corporate tax rate, and a general unwillingness to allow creative destruction (a pillar of capitalism) to occur.

    • overshoot

      jimbob54, that’s an impressive list to accomplish in a bit over two and a half years.

      Especially the part about the government workers, since as of last month the government sector was down more than half a million since 2008. If there have been more than a half-million new government jobs since the last jobs report, we’re truly off to a good start on reducing unemployment.

    • Primrose

      But as Mr. Frum has pointed out, inflation lowers the debt burden.

      Additionally, Job creation lowers the entitlement rolls, particularly unemployment insurance, and And inferior skilled workers are due to a failure of the government to spend on its people, not overspending.

      As for the environmental regulations, a environmental degradation has plenty of costs to our country, and business. Workers that need more sick days because of asthma, or other environmentally related issues, for a start.

    • pnwguy


      “Not to mention a much higher ratio of wealth-destroying government workers to wealth-creating private sector workers”

      So an investment banker who bets in the Wall Street casino and loses several billion dollars for his firm is a “wealth creator” while a Ph.D. researcher at the National Institute of Health who discovers a new treatment for heart disease is a “wealth destroyer”. Same goes for the smoke jumper that stops a forest fire from burning down the neighboring community. Thanks for the clarification. I was confused.

    • rockstar

      Don’t forget banks being forced to give half-million dollar mortgages to anyone with a pulse.

      • Primrose

        How forced? They bent the rules because they could sell the mortgages in packages to other people and make a bunch of money. Not exactly twisting their arm, there.

  • Graychin

    What changed?

    The party of the incumbent president. That’s what changed.

    Anyone who thinks that Robert Bartley was an honest commentator on economic matters instead of a bitter partisan is either deluded – or a bitter partisan himself.

  • StreetSign

    Obvious: capitulation to the Tea Party.
    But now that David and the Neocons are temporarily out of the business of bringing Democracy to the Middle East, and the Republican party has capitulated to the “tea party”( the evidence of which is proven by the “outrageous” letter to Bernanke from McConnell, etc) he might turn his considerable intellect to something useful, like envisoning a Federal Reserve which is relevant to gowing an economy in the new context of globalization, a permanent bifurcation of wealth in the U.S., permanently mismatched and lack of worker skills in the U.S., and the lack of any actual transmission method which can funnel liquidity into mortgages and business startups.

  • dubmod

    Gee, Dave have you just not heard abot Perry’s speech?

  • Arms Merchant

    As usual, Frum is mixing apples and oranges.

    Few Republicans object to current low interest rates, and would very much like to see some easing of loan requirements to help encourage business growth. But most strong businesses have cash and don’t need loans, while those on the brink don’t qualify or don’t want to take on more debt. With interest rates already at historic lows, looser monetary policy means printing or borrowing, not lowering rates.

    Whether the Fed should be printing more money is an entirely different question. The dollar is already weak, while food and energy prices are headed up, and American consumers are net importers. Printing will encourage a weaker dollar, increasing the pain. So under these circumstances, do we really want the Fed to debase the currency even more?

  • Oldskool

    How many other issues does this kind of contradiction apply to? Health care for sure, Nixon’s EPA, Eisenhower’s interstate hwy system, taxes as mentioned above, … who knows how many others.

  • nhthinker

    What got us into this economic crisis is a US populace that would rather spend on indulgences rather than spend on improving their own productivity: all while the middle class jobs competitors in the third world grew to dwarf the size of the middle class in America. Combine that with a housing crisis that was ALL about improper loan requirements and it is actually stupid to suggest that loan requirements for American businesses should be eased. Banks should be making smart loans- not politically motivated ones like the half billion dollar loan to an obviously flawed Solyndra.

    Loans that focus on improving the populaces global competitiveness are key to turning the economy around. Government needs to focus on improving the opportunity to bring foreign investment to the US to provide substantial jobs that improve our trade balance.
    More Mercedes and BMW plants and a continuation of the erosion of labor prices to be closer to the cost of the world market.

    High inflation is one method to get US labor cost more in line with global realities. If the dollar is worth half as much, it is equivalent to halving everyone’s wages- including minimum wages. The problem with inflation is that the government is misspending all those inflation dollars and delaying the real corrections that need to take place. High inflation also causes flight to gold and other metals and not into real economic investment.

  • icfantv

    hmmmm. no mention of the entire Bush family’s involvement in the failed S&L scandals. how disappointing.

  • baw1064

    This column needs a coy reference to the “lie back and think of England” statement from the Victorian era.

    maybe “lie back and think of Reagan”? :)

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  • sinz54

    “Question: if conservative journalists could write so feelingly about the need to inject credit during the downturn of 1990-1991, how is that they have arrived at exactly the opposite policy conclusions during the much more severe downturn and deleveraging of 2009-2011?”

    Because the recession of 2009-2011 is NOT the same type of recession as the one we had in 1990-1991. Even liberal economists admit that, as they compare the current economic slump to that of the 1930s.

    The 1990-1991 recession was a typical cyclical downturn, caused mostly by the Middle East oil problems and Bush 41′s stupidly raising taxes combined with his defense cuts due to the end of the Cold War. For that type of recession, Fed policy can make a big countercyclical difference.

    That’s not the problem we faced in the 1930s, and it’s not the problem we’re facing today.

    Those two problems were caused by a crash in highly leveraged assets–stocks in 1929-1932, and real estate in 2008-present, bankrupting investors. The current problem is more like the Japanese “lost decade” in the 1990s, which was also caused by a collapse in leveraged real estate. Only worse because in Japan it was commercial real estate. In America, it’s Americans’ homes that crashed in value.

    The Fed can’t fix that. If you’re upside-down on your mortgage, you won’t be able to refinance it no matter how low the current interest rates are. No bank will loan you money when you haven’t got enough equity as collateral. And if you’re facing either bankruptcy or foreclosure, you won’t be able to get an auto loan or home equity loan no matter how low those interest rates go.

    Right now, an amazing 23% of American homeowners are upside-down on their mortgages. Those folks aren’t going to be buying big-ticket items on credit for a very long time.

    And I don’t see a lot of liberal economists who think that what the Fed has done is going to work.

    I don’t understand how people’s memories can be so short. Just a couple years ago we were all talking on FrumForum about those subprime mortgages and how they left Americans hopelessly exposed financially. Does anyone think that can be fixed now by manipulating interest rates???

    We Americans are going to have a Japanese-style “Lost Decade.”
    There is no way around that, short of forcing the banks to take a huge haircut by writing down the principal of all those upside-down mortgages.

    Or fighting World War II all over again. That was the only thing that ended the Great Depression. Drafting all that excess unemployed labor into the Army sure helped lower the unemployment rate.

    • baw1064

      I agree, and I think the banks should be forced to take a haircut, or at least to acknowledge the portion of the mortgages that is unsecured debt (because it exceeds the value of the collateral).

    • Traveler

      Sinz is dead on the money (pun intended) on this one. Read yesterdays Bloomberg about how Dimon was bitching about doubling capital requirements, when the bonus pool alone for 2009 would have covered that for JPM. That sure indicates where the cash is being siphoned off. So if the banks are doing so well after we bailed them out, why not make them take a haircut for the nonperforming loans? Might as well use some of that extra cash that cannot do anything just sitting in the banks. Would slow down the foreclosures and pump a ton into the economy. But wishful thinking…

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