In the agonizing four-month interval between the November 1932 election and the inauguration of President elect Franklin Roosevelt in March 1933, the American banking system shut down completely.
New York Times columnist Paul Krugman wrote a great column about this issue, in which he wrote that “the outgoing administration had no credibility, the incoming administration had no authority and the ideological chasm between the two sides was too great to allow concerted action. And the same thing is happening now.”
Outgoing President Herbert Hoover repeatedly beseeched FDR to do something, anything, to calm the public. FDR demurred over and over again. Fear and panic filled the void.
[FDR on inauguration day: from the Life archive on Google.]
Back in 1933, Americans across the country, realizing that Washington was stuck in a state of deadening paralysis, “scurried to their banks, queued up with bags and satchels, and carted away their deposits in currency or gold,” wrote historian David M. Kennedy in his Pulitzer Prize winning book, Freedom From Fear. To stem the panic, states declared banking holidays. By inauguration day, government decrees had shut down every bank in 32 states.
Today, I don’t think the banking system is as bad off as it was in 1933, though it does appear to be weakening. But we do face a whole new raft of risks.
One, we are still facing a liquidity crisis. Without a federal stimulus packages or some sign that the government is willing to pump up the economy, credit markets could remain paralyzed and banks could remain unwilling to lend.
Two, we are still facing a crisis of confidence. Deflationary powers could strengthen and wipe out even more jobs. Without strong government action over the next 90 days, the stock market is likely to continue to drop, zapping wealth and making consumers less likely to spend, forcing more companies into restructuring or bankruptcy.
Three, we are facing a car crisis. Washington needs to apply its power to force a restructuring of the automobile industry–and avoid a chaotic flameout could send unemployment into near–Depression era levels.
The question is whether or not Detroit–a crucial industry and national security asset–needs to be put through bankruptcy in order to do so. The emerging consensus seems to be, yes, a pre-packaged and orderly bankruptcy would be the best course of action, and I tend to agree with that. Congress did the right thing by denying Detroit a bail-out. Now, it needs to help revamp Detroit and create an industry that is truly competitive. But acting now is crucial. This week, two of the three CEOs of U.S. car companies basically admitted they are teetering on the edge of bankruptcy.
Against this darkening outlook, it comes as a welcome relief to see Barack Obama accelerating his transition plans and proposing a more aggressive stimulus package. It shows that he is not following one lesson of FDR: stiffing the American public for political gain. Hardly anyone remembers that FDR put politics over the American people before he took over office but his lack of action caused a lot of pain for a lot of people.
As Kennedy writes, one of FDR’s advisors once said that FDR “either did not realize how serious the situation was or . . . preferred to have conditions deteriorate and gain for himself the entire credit for the rescue operation.”
Let’s hope the Republicans work with Obama and the Democrats to craft a package that can be signed into law the day he takes over from the Bush Administration. (Or maybe Congress could pass some smaller mini-stimulus package ahead of a big bold Obama package.)
Obama campaigned on the premise that he would put the people before politics. That solving America’s problems was more important than scoring ideological or political points. This is his first big test and chance to prove that he was not blowing smoke.
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