Wednesday Night Live
Presidents, Wall Street, and the forgotten man.


Amity Shlaes knows depression. So when the topic came up in relation to the market mess and bailout debate, National Review Online editor Kathryn Lopez called on Amity Shlaes, New York Times bestselling author of The Forgotten Man: A New History of the Great Depression. Here’s what she had to say about the presidnet’s Wednesday-night primetime address to the nation, Sarah Palin, and the solutions to come.

Kathryn Jean Lopez:
Did the president need to give that address?

Amity Shlaes:

What did you think of what he had to say?

Bush did a fine job. But it seemed all pain and no good news. At issue here, as Bush pointed out, is relative competitiveness. Money flowed into the U.S. Missing tonight was a promise of good changes that would sustain U.S. attractiveness. The White House is too embarrassed to talk about markets and tax cuts at this point. They would be mocked. But a cap-gains rate of five percent, more tort reform…. items like that would hasten recovery.

Is McCain overreacting with his delay-the-debate plea?

This seemed a counterproductive on move on McCain’s part. Foreigners watching U.S. markets T.V. learn that a leading politician is actually interrupting campaigning because of the crisis. That’s unusual for the U.S., it takes the emergency to a new news level, and so sends a creepy message. McCain’s version of crisis mode generates fear, not calm. He shoots from the hip way too much on the economy. No wonder the Nikkei has already fallen two percent (9:52 P.M.). It’s disappointing since he has the capacity to lead an adequate clean up action.

Lopez: Are conservatives right to have some reservations about this Paulson plan?

Shlaes: Absolutely. Too much discretion for the executive branch.

Is Sarah Palin right to agree to Katie Couric’s question about a Great Depression being a possible result of no congressional action?

Shlaes: She was punting. Lots of Depression comparisons. Larry King spoke of current crisis being a “once in a century” event. These past weeks are indeed something new in our lifetimes. But not as dramatic as the Great Depression. As Dick Sylla of NYU says, then, 7,000 banks failed. That can’t happen now because we don’t even have 7,000 banks. But seriously: This is a problem that can still be fixed over time. The Dow dropped more than 85 percent in the Depression. That’s possible now but it does not have to be.

Lopez: Do you see any parallels to the run-up to Depression right now?

Shlaes: Sure:

1) Cavalier attitude toward protectionism. President Uribe of Colombia has been running around New York this week, but our bilateral with him won’t pass unless Speaker Pelosi Democrats stop treating trade agreements as optionals. This past summer at the Council on Foreign Relations, where I work, Douglas Irwin of Dartmouth published a great paper on Cordell Hull, the Democrat who established the modern free-trade tradition. Where is the Hull of the Democrats now? It could be Bob Rubin.

2) Cavalier attitude toward tax increases — they are viewed as necessary medicine. No one talks about the negative effect of the tax increases in the early 1930s. Ogden Mills of the Treasury read them out funereally: radio taxes, tobacco taxes, estate taxes even though Treasury Secretary Mellon had worked so hard to reduce those in his years in office. Those increases marked the end of an era and contributed to the duration of the Depression in the 1930s.

3) Darkening picture overseas.

4) Prosecutorial zeal. The news that the FBI is going to investigate all these companies recalls the Pecora Commission of the early 1930s. Pecora left his job by the mid 1930s but the economy stayed in the dumps another half decade.

Lopez: Are there policies that we got used to after the Depression that contributed to the problems we have today?

Shlaes: Roosevelt did good when it came to mortgages. Almost like Moses, he decreed features we still see as the standard today. Let mortgages have similar rates across the country. Let the interest rate be fixed. Let people be able to pay off their mortgages in ten or twenty years. FDR despised interest-only loans, which were common then.

Remember, in the Great Depression, people who owned 90 percent of their houses still lost them. Until recently at least we’ve been talking about people who own ten percent losing them.

Hoover’s Reconstruction Finance Corp. begat the entities that begat Fannie and Freddie. But the idea that homeownership is an entitlement, rather than a contractual responsibility, is fairly recent. Fannie and Freddie’s off-budget aspect we can date to LBJ. In my Bloomberg column I tried to trace that.

Is there a forgotten man in this mortgage mess?

Shlaes: The taxpayer. The forgotten man is also the one who doesn’t happen to be in a favored constituency under the Treasury bailout. They’ll be plenty of favorites and non-favorites in the Treasury bailout, at least as outlined. Let’s hope the administration, Obama, McCain, and Congress make the regime more systematic and less discretionary when they write their changes in coming days.