Amity Schlaes -- Don't follow the lessons from FDR

Readers know exactly how we feel about the bailouts being handed out by Congress. While the bank bailout might have been necessary, according to some, we disliked it. Congress, in effect, rewarded bad management, and reduced the level of culpability that they perpetuated in: A) Refusing to conduct necessary oversight of Freddie and Fannie; B) Refusing to reform Freddie and Fannie when it was discovered there were problems with both institutions (problems promptly decried by Democrats like Barney Frank and Maxine Waters); C) By pressuring mortgage lenders to hand out mortgages to people they KNEW couldn't afford them.

So, Congress bails out the mismanaged FHA entities, and they also bailed out banks. Then came the Big 3 getting their loans, which will amount to more of a headache just a few short months down the road when they return to Congress asking for more money. (This is due to the fact that neither Chrysler or GM -- Ford refused the loans -- have a plan to downsize and reorganize using this loan.)

And the bailout saga goes one with more and more people looking to the federal government for help. Amity Schlaes, author of "The Forgotten Man: A New History of the Great Depression," warns people not to look to FDR for a solution to this economic problem:

The United States has entered the era of the experiment. President-elect Barack Obama is putting forward an infrastructure program whose plans and price tag are unclear. Treasury Secretary Henry Paulson whipped up the Troubled Asset Relief Program to buy up bad mortgage instruments, and, expanding on that experiment, President Bush wants to try extending TARP to autoworkers.

The idea that experiments are warranted in current circumstances comes from the New Deal. The official history is familiar: FDR put forward multiple projects, some at cross-purposes. Yet New Deal inconsistency was not a problem and might have been a virtue. Through "bold, persistent experimentation," his catchphrase, Franklin Roosevelt brought recovery.

Modern economists, monetarist or Keynesian, have not rejected this story line. The trouble with the 1930s, in their view, is that government did not fiddle enough. Had the Federal Reserve, the Treasury or the White House fiddled more, the Depression might have been shorter or less severe. The New Deal Fed, they say, never got the price level quite right. Or, the New Deal stimulus programs were too little. And so on.

But there is significant evidence that the very arbitrariness of the New Deal made the Depression worse.

In 1932, stunned market players and citizens wanted to know what the new rules were. They voted for a party with a platform so moderate it could have been written by today's Concord Coalition: stability, sound money, balanced budgets. That was the Democratic Party, led by Roosevelt.

Many of FDR's initial plans did bring stability: His first Treasury secretary worked to sort out banks with the outgoing Hoover administration in a fashion so fair that an observer noted that those present "had forgotten to be Republicans or Democrats." By creating deposit insurance, FDR reduced bank runs. His Securities Act of 1933 laid the ground for a transparent national stock market. Equities shot up.

But other policies were more arbitrary. Using emergency powers, FDR yanked the country off the gold standard. Both American and international markets looked forward to a London conference at which a new monetary accord was to be struck among nations. Over the course of the conference, though, FDR changed orders to his emissaries multiple times. Some days he was the internationalist, sending wires about international currency coordination. Other days he was the cowboy, declaring that all that mattered was what the dollar bought in farm states. The conference foundered.

Some of the worst destruction came with FDR's gold experiment. If he could drive up the price of gold by buying it, he reasoned, other prices would rise as well. Roosevelt was right to want to introduce more money into the economy (the United States was deflating). But his method was like trying to raise an ocean level by adding water by the thimbleful. What horrified markets even more was that FDR managed the operation personally, day by day, over a breakfast tray. No one ever knew what the increase would be. One Friday in November 1933, for example, Roosevelt told Treasury Secretary Henry Morgenthau that he thought the gold price ought to be raised 21 cents. Why that amount, Morgenthau asked. "Because it's three times seven," FDR replied.

Morgenthau later wrote that "if anybody knew how we set the gold price, through a combination of lucky numbers, etc., I think they would be frightened."

They were. The "Roosevelt Rally" flattened. The arbitrary quality of other initiatives reinforced concerns. The New Deal centerpiece, the National Recovery Administration, helped some businesses compete and criminalized others for the same behavior. Sometimes Roosevelt goaded federal prosecutors into harassing corporate executives. Other times, he schmoozed the same execs at the White House. In 1936, FDR pushed through deficit spending. In 1937, he was Mr. Budget Hawk.

Uncertain, markets froze. Businesses refused to hire or invest in equipment. Unemployment stayed stuck in the teens. The 'deal' part of the New Deal phrase was problematic; businesses didn't want individual favors, they wanted clear laws for all. Industrialist Ernest Weir summed up what his community was desperate for FDR to do: "Above all to make the program clear and then stick to it."

Today, uncertainty also chills. Questions abound over the future regulation of stocks and derivatives, over tax policy, over bailouts. All this makes it hard for the market to settle on equity or home prices. And Americans follow stories about names -- Secretary Paulson, Secretary-designate Timothy Geithner -- more than they do the news about the Fed or the Treasury.

Luckily, we are entering the optimal time for reducing uncertainty: a new president's first hundred days, with a majority to back him on the Hill. Obama might start by rebuilding key institutions: creating a super-Securities and Exchange Commission, a tough regulator with clear plans for overseeing stocks as well as those instruments that had been monitored unpredictably because of vague status. He should also halve corporate tax rates, currently some of the world's highest, and reduce the capital gains rate to 5 percent. Rewriting the Fed law to clarify it will make avoiding an Alan Greenspan bubble easier. Defining his infrastructure program clearly would have the effect of putting up a sign: Open for Business.

Some will say all that sounds politically impossible. Until recently, though, so did a trillion-dollar infrastructure project. A new hundred days spent making good laws will bring sturdy recovery. A hundred days spent making more deals will not.

She's correct on so many levels. The constant tinkering and interference -- basically band-aids for a severely weakened economy then -- worsened the Depression to the point where the only thing that brought us out of it was World War II. Obama clearly has stated a specific plan of attack to combat the market instability, and unfortunately it appears that all he has to offer is more money fed to failing industries thereby rewarding their mismanagement and incompetence. This is not the solution, and neither is following FDR's model.

We know a lot of economists claim that there are two ways out of this mess. First, deficit spending, and second, print more money. The problem is that as of right now, our deficits are soaring, and it only makes the economy more unstable. Printing more money brings the possibility of devaluing our dollar, and raising inflation.

Ms. Schlaes is correct that the very first step to recovery is cutting taxes, especially the corporate tax rate. this is something that Larry Kudlow has explained time and again ever since the economic freefall occurred. ALL taxes need to be slashed. Start with the high corporate tax rates, move onto payroll taxes, and finally income taxes. The people, with more money in their pocket, can turn the economy around because we're the ones fueling it. It's not the government fueling the economy, though there are those on Capitol Hill that would love nothing more than to federalize many industries. We fuel it. We're the ones buying stocks, making investments, buying goods and services, etc. With lower tax rates, the recovery would come much quicker.

Then comes the sensible approach of regulations, reorganization, and oversight. the government dropped the ball in their oversight of the FHA, and stuck their noses into the mortgage lenders demanding they give out more mortgages to people who couldn't afford a home to get them in a home. Nowhere in the Constitution does it say that the people have a right to a home, so why did Congress do this? My rough guess is that they did it to show people they cared about their plight. Big whoop. thanks to their caring, we're in this mess. They broke it, and now it's time for them to fix it. But in no way should we allow those that failed to keep this from happening be in on how to fix it. For them, they still refuse to accept the responsibility of their actions. That tells us they haven't learned their lesson from this mess. If they haven't learned their lesson, then they shouldn't be participating in fixing a damn thing.

Publius II