Lessons From FDR’s First Ten Days?

Somewhat lost in this week’s media-created milestone of the first hundred days of the Obama Administration, and the inevitable comparisons to Pres. Franklin D. Roosevelt’s momentous First Hundred Days (so momentous that they became a proper noun) is FDR’s even more extraordinary accomplishment in his first ten days:  the resurrection of the U.S. banking system.  Such resurrection, as you may have heard, has so far eluded Pres. Obama and his predecessor.  Are there lessons from how FDR and his guys did it?

First, a quick timeline:  FDR took office on March 4, 1933 (after that, the 20th Amendment moved the inauguration date up to January).  On March 5, he declared the famous “bank holiday.”  On March 9, he got Congress to pass the Emergency Banking Act, to give his administration unprecedented powers over the banks.  On March 12, he gave his first “fireside chat,” assuring people that the banks were about to reopen and would be healthy when they did.  On March 13 (day 10), banks reopened in 12 cities.  By March 16, the administration’s massive audit and purge operation, more than 70 percent of U.S. banks had reopened, while others were closed.

Economic historians are in less-than-complete agreement about the New Deal’s overall macroeconomic impact, with a substantial minority in a recent survey agreeing with a proposition that the New Deal harmed the economy.  But there does seem to be consensus that the bank overhaul was a great success.  Even FDR advisor-turned-harsh-critic Raymond Moley described it in glowing terms.  With the president’s signing of the Emergency Banking Act, he wrote in After Seven Years (a classic among Roosevelt bashers), without sarcasm, “The sequence of bold, heart-warming action had begun.”

The personnel involved in the great bank triage operation, which involved some 15,000 banks (i.e., twice as many as we have now) were various Treasury and Federal Reserve officials, with Secretary of the Treasury William Woodin at the helm.  In Moley’s words:

‘ . . . as I look back at those frenzied days, it seems to me that the country has never quite realized the extent to which Woodin, [Hoover’s Undersecretary of the Treasury Arthur] Ballantine, and, last but no means least, [Hoover’s Acting Comptroller of the Currency F.G.] Awalt helped to restore the confidence of the country by a rapid and unprejudiced approximation of the equities — social as well as financial — involved in each case. . . .’

‘Capitalism was saved in eight days, and no other single factor in its salvation was half so important as the imagination and sturdiness and common sense of Will Woodin.’

Mister, we could use a man like William Woodin again.

(to be continued)

Much ado about nationalization

The word “nationalize” has at least one great use, in the punchline of a hilarious Winston Churchill story.

But in the current media firestorm over bank nationalization, maybe it’s time to abolish the word as harmful to thought.  (David Paul seems to agree.)

I’ve used the term myself and like the idea of the government temporarily seizing control of the big zombie banks, but “nationalization” has been bandied about so loosely that it’s lost its meaning.  Many people described the Bush-Paulson capital injections (via purchases of preferred stock that gave the government small nonvoting stakes in some banks) as nationalization, when they were really just crude subsidies (as Willem Buiter pointed out).  And if it’s nationalization for the government to temporarily take over a failing bank so as to help depositors and creditors,  avoid systemic risk and arrange for the orderly sale of its assets, then we’ve been doing it for over 75 years, ever since the creation of the FDIC.  In fact, by some compelling accounts, Sheila Bair’s FDIC has been the one shining light in this crisis.

Turning Japanese?

Yesterday’s NYT continues the paper’s excellent coverage of the financial crisis with Hiroko Tabuchi’s article “In Japan’s Stagnant Decade, Cautionary Tales for America.” Notable quote:

‘“I think they know how big it is, but they don’t want to say how big it is. It’s so big they can’t acknowledge it,” said John H. Makin, an economist at the American Enterprise Institute, referring to administration officials. “The lesson from Japan in the 1990s was that they should have stepped up and nationalized the banks.”’

When someone from the American Enterprise Institute says it’s time to nationalize, then it’s probably time for policymakers to show a little openness to it (e.g., “only as a last resort,” “we’re not ruling out anything”).

Nationalize it, mon

The sticking point in the lingering credit crunch seems to be the remaining toxic assets (or dodgy assets, as the Brits call them) on the balance sheets of so many banks, especially the big problem banks that are getting government bailouts or are in line for them.

The sticking point in the policy question of how to remove those toxic assets as an obstacle to normal financial intermediation seems to be valuation, i.e., as Winston Churchill is said to have put it, a matter of haggling over the price.   No small haggle, this.   It’s often said that there is no market for these assets, and that appears to be true in the sense that there seems to be an unbridgeable gulf between what banks say those assets are worth (97 cents on the dollar?) and what they’ll fetch on the open market (38 cents on the dollar?  The numbers are from a New York Times article, 2 Feb. 2009, and refer to a particular mortgage-backed bond.  A division of Standard & Poor’s estimated the bond’s value at 87 cents or 53 cents under a less optimistic scenario. )  Treasury Secretary Tim Geithner’s plan for the remaining $350 billion of last fall’s bank bailout is due to be unveiled Tuesday, and advance word is that it calls for the Treasury to buy up a lot of those toxic assets and quarantine them in a “bad bank.”

The best argument yet for nationalizing the banks

And naturally it comes from a bank.  Headline on MSNBC.com:

Bailed-out Wells Fargo plans Las Vegas junket:
Company spokesperson says event is part of the bank’s culture

Brings to mind somebody’s great line that the financial sector is like a casino, except the casinos are strictly regulated by the government.

Really, actions like this probably do more than a thousand Paul Krugman columns to whip up support for nationalizing the big problem banks.

More on nationalization coming up soon.

UPDATE, FEB. 4:  Wells Fargo subsequently decided that the Vegas junket was not such a good idea, at least if people knew about it.   Coincidence or not, the reversal came in the same news cycle as Obama’s announcement about executive pay restrictions on companies receiving bailout money.  Let the loophole mining begin — the new restrictions apparently pertain only to salaries and bonuses, not extravagant junkets or million-dollar office refurbishings.