Eric Rauchway has written an excellent review of Reed Hundt’s new book about the missed opportunity of Obama’s early presidency, framed around a topic he’s exceedingly well qualified to discuss: the contrast between Obama and FDR. As Rauchway writes,
While many voters hoped Obama’s policies might represent a dramatic change along the lines of the New Deal, instead Obama acquiesced to emergency considerations and ideological blandishments aimed at tempering expectations and a return to “normalcy.”
So why did things work out this way? Rauchway suggests one reason was the Obama team’s dubious interpretation of the transition from Hoover to FDR (under the then-operative rules, it was not until March 1933 that FDR took office after his election in November 1932). During this transition—described in Rauchway’s outstanding Winter War and in less detail but larger context in his equally indispensable Money Makers—Hoover argued that the worsening financial panic stemmed from fears of radical measures, including renunciation of the gold standard, that might follow FDR’s assumption of office. As Rauchway shows, by refusing any active policy to fight the panic, such as declaring a national banking holiday, unless FDR would formally proclaim his support, Hoover sought to bounce FDR into renouncing the New Deal and endorsing liquidationist orthodoxy. FDR did not play along. In his memoirs, Hoover decried FDR’s supposed irresponsibility in allowing the panic to worsen for political advantage (though this amounts to projection—nothing prevented Hoover from acting on his own). Hundt quotes a key member of Obama’s economic team invoking Hoover’s self-serving version of history to defend cooperation with the Bush administration in the autumn of 2008, and Rauchway writes that Geithner and Obama himself have made the same argument.
Hoover’s effort to use inaction in the face of a raging financial panic as a means of political coercion to constrain democratic choices regarding economic policy is hardly unique. Following Karl Polanyi, I’ve called it “governing by panic,” and it’s a kind of politics that needs much more analysis. Though Polanyi was not a fan of the economic reasoning that led FDR to break with the gold standard in 1933, he saw its political significance as enormous precisely because it weakened the power of financiers to dictate policy by threatening a market meltdown.
The situation was somewhat different in 2008-2009, though. One can’t say that in late 2008, Obama tied his hands and made the sort of surrender that FDR avoided in the winter of 1932-1933. Scope remained for much more decisive and radical action, on restructuring banking, on fighting foreclosures, and on fiscal stimulus, than was in fact adopted. Indeed, it is explaining the decisions made in this period that is the focus of Hundt’s book.
In understanding these decisions, I would certainly not gainsay the importance of Obama’s choice to rely on economic advice from neoliberal establishment figures, and the political timorousness of his team when it came to stimulus spending. However, to explain the contrast between the Hoover-FDR period and the Bush-Obama one, I would argue that the role of the Federal Reserve was crucial. From 1929-1932, the Fed’s monetary policy was staggeringly passive (a picture persuasively drawn in Friedman and Schwartz’s Monetary History and which is thoroughly borne out by more recent research). Key Fed officials did not view its role as serving as a lender of last resort for failing banks, nor did they believe they had much capacity to improve the economic situation through monetary easing. Unlike Hoover, Fed officials did not try to use withholding of panic-fighting measures as an instrument of political pressure (though some of their reluctance to buy government bonds in open-market purchases derived from fear that this would encourage deficit spending), since this approach would have required them to believe that they could do something about it in the first place. Indeed, the Fed’s most active panic-fighting measure was to entreat Hoover to declare a bank holiday.
The Fed’s passivity was bad for the economy, but it was probably good for democracy. The case for monetary expansionism, if it was going to carry the day, needed to do so in the court of public opinion. During Hoover’s presidency, schemes for monetary expansion were proposed in Congress and remained a matter of broad public debate, continuing a stream of non-technocratic deliberation on monetary policy that stretched back to the monetary populism of the late 19th century. In Money Makers, Rauchway shows that in early 1933 FDR stage-managed a showing of strong Congressional support for monetisation of silver as a way of building support for his own less radical policy, but there’s no question that FDR’s monetary innovations drew on a tradition of economic thinking nourished by its engagement with popular politics and that did have substantial currency (so to speak) in Congress. Congress subsequently passed broader banking reforms and a revision of the Fed Reserve statutes that included provisions that proved crucial to giving the Fed flexibility in the crisis of 2008. Congress also supported FDR in his casting aside of the budget-balancing orthodoxy that was prominent in his election campaign. Whether to credit the post-1933 recovery to fiscal policy, to monetary policy, or simply to the broad optimism FDR was able to promote is a matter of some scholarly controversy. However, there is no question that FDR’s administration and Democrats in Congress felt it their right and duty to shape a comprehensive crisis-fighting policy; no one else was going to do it for them. When the Fed did not act to contain the crisis, it was tackled through the democratic process.
The early 21st century situation was strikingly different. As a leading scholar of the Great Depression, Bernanke was very determined to avoid a repetition of the Fed’s notorious passivity. Unlike the leaders of the ECB, he did not consider it his place to use financial meltdown as a bargaining tool to promote political ends. (Those untroubled by the place of central bank independence in a democratic order ought to consider this contrast—the personal qualities and economic philosophies of individual central bankers made an enormous difference to policy in the crisis; they had huge scope for discretion and were very distant from accountability.) Had it not been for unprecedented discretionary Fed action, the financial crisis would have become catastrophic well before September 2007, when the ill-fated decision to allow Lehman to fail set off a global financial implosion. Immediately thereafter, the Fed resumed pulling out all the stops to do what it could to mitigate the effects. It was clear, though, it could not do enough. Congress was brought into the crisis-fighting effort only at this point, and presented with in effect a binary choice—approve TARP or watch the meltdown spread. The best way to win a game of chicken is not to have any brakes; with the Fed and other central bankers overwhelmed, that was in effect Paulson’s situation in bargaining with Congress. It is fair enough to argue, as Rauchway does in his review, that the Democrats could and should have used the threat of withholding support for TARP to extract more serious concessions. Perhaps the mythology of FDR’s irresponsibility did contribute here. However, the broader issue is that Congress was involved only when a Fed-led effort to address the crisis had broken down, and asked in an atmosphere of incredible tension to offer the executive the discretion and financial means needed to patch that effort up. Precisely because the Fed had the power and independence to be a plausible headquarters for fighting the financial crisis, the democratic process was sidelined.
Hundt apparently offers new details on the early 2008 decision of the Obama administration to request a fiscal stimulus far smaller than administration economist Christina Romer had advised. (Romer had made her reputation in part by arguing that FDR’s fiscal stimulus was too small to reverse the Great Depression, and that it was monetary policy, fortuitously eased by international capital inflows, that did the trick; in 2009, with the Fed already stimulating for all it was worth, this was not going to happen again.) The basic picture has been clear for a long time: Obama’s advisers thought a larger stimulus could not have made it through Congress. But why not? Christopher Adolph, in an important essay, invites us to
imagine a historical counterfactual: suppose that in 2008–2012, central banks had either suddenly ceased to exist or somehow credibly committed to take no further monetary policy action once the zero-bound had been reached. Would elected governments have remained so reluctant to order fiscal stimulus if there were no hope of a central banker ex machina waiting in the wings? Or would the divided and conservative governments of the time been forced to turn—as so many did in the twentieth century—to Dr. Keynes’ usual remedy? A broad increase in spending and tax breaks surely would have reduced economic inequality, in sharp contrast to the persistent and rising inequality that followed the policy leadership of the Fed and the ECB.
Does the existence of a politically-insulated central bank savior crowd out more redistributive fiscal alternatives? Could it, in fact, foreclose public debates on the role of government in a recession because an actor with no electoral connection stands ready to staunch the bleeding?
The passivity of the Depression-era Fed means that we don’t entirely have to imagine the counterfactual. With the central bank out of the picture, the democratic process delivered in both fiscal and monetary terms. Recent scholarship has emphasized, properly, the racially exclusionary character of much of the New Deal, deriving from FDR’s desire to keep Congressional Democrats from the South on side. This is deeply distressing, and the long-term consequences were dire, but it also serves to reinforce the point that the New Deal was made possible through political bargaining processed through the electoral institutions.