Obama's first economic lesson: blame Bush

http://www.timesonline.co.uk/tol/comment/columnists/william_rees_mogg/article5119348.ece

From The Times
November 10, 2008
Obama's first economic lesson: blame Bush
As in 1933, the President-elect faces a disaster not of his making. Today, however, he may be able to stabilise the depression
William Rees-Mogg

Next Saturday there will be a meeting of the leading economic nations, the G20, in Washington to review the world economic crisis. It is not clear how much Barack Obama, the President-elect of the United States, will be involved. He faces the same dilemma as Franklin Roosevelt, who was President-elect in 1933.

Herbert Hoover, the outgoing president, was engaged in negotiating the preliminaries for the World Economic and Monetary Conference that was to be held in London in July of the same year. By that time Roosevelt would be president.

Roosevelt blamed the slump on Hoover, and was determined to create his own policies to deal with the crisis. In his perceptive biography Franklin Delano Roosevelt, Conrad Black observes: “Roosevelt fundamentally thought that the focusing on foreign causes for the Depression was a scam and an evasion... He believed that efforts to lay great stress on the potential of international conferences to achieve much that would be useful were just attempts to shirk responsibility for the monstrous failure for which Herbert Hoover as President, and for eight years before that as Secretary of Commerce, was more personally responsible than anyone else.”
There is no reason to think that Senator Obama feels as angry about the economic policy failures of George W. Bush as Roosevelt felt about Hoover, but the political situation is the same. In 1933 the outgoing Republican Administration left the legacy of the Great Depression. By 1933 that had already cost them the presidential election of 1932; as the party of the slump they went on to lose the elections of 1936, 1940, 1944 and 1948. Any competent professional politician in Roosevelt's position would have wanted to nail the Republican Party with responsibility for the slump. Mr Obama is a highly competent politician. He will want to avoid sharing responsibility for the greatest economic catastrophe since the 1930s. To start with, he will want to make sure of his second term. He will put the blame on the Republican Administration, and reasonably so.
The economic policies of the new Administration have not yet been established. The President-elect has a number of first-class advisers, people of judgment, courage and experience; yet the administrative team has yet to be appointed. During the Washington conference, Senator Obama will be well advised to listen to the visiting statesmen, as no doubt he will, but he can hardly be ready to enter into policy commitments.

During the conference one could expect Senator Obama to listen more than he talks. Quite simply, he is not yet the president; he has huge influence but no official authority. Nor is he indeed an economist by training. He will take his own big economic decisions, but he will want first of all to receive the advice he will be given by an administration that has not yet been formed.

In any case, the leading figures of the G20 countries are not themselves agreed on the best policies to pursue. The President of France, Nicolas Sarkozy, seems to want a second Bretton Woods, the 1944 conference that created the postwar fixed-rate exchange system; the system lasted until 1971, when President Nixon ended the convertibility of the dollar into gold.
It is not clear which, if any, countries other than France now want to move back towards a fixed-rate system. Gordon Brown, as Chancellor, blocked British entry into the euro, which is itself a fixed-rate currency. Mr Brown seems to want a new structure for the main global institutions, the International Monetary Fund and the World Bank. However, the Washington conference does not contemplate a new world monetary treaty. Nothing can be decided at this stage on structural reform, nor could it be be a cure for a depression.

In the meantime, the economic situation is continuing to deteriorate, just as it did in the early 1930s. The worst period of the Great Depression occurred between the election of Franklin Roosevelt in November 1932 and his inauguration in March 1933. That was when the largest number of American banks had to close. There is no reason to think we have yet reached the bottom of this depression.

We do now seem to have reached the stage when a financial crisis transmutes into a general crisis of the economy. It is no longer the banks that are causing the greatest worry, but the potential collapse of the American automobile industry. The two largest manufacturers, General Motors and Ford, are asking Washington for funds comparable in size to the bailout of the banks. European car manufacturers are also suffering a disastrous slump in sales.

The recession is already spreading into the wider world of business, with large businesses having to lay off an increasing number of workers, and smaller ones shutting down. There are now foreclosures in almost every street. It is a time of many domestic financial tragedies in the US and in Britain.

In 1932 one of Roosevelt's advisers, the great American economist Irving Fisher, described the critical tipping point of a depression. “There may be equilibrium which, though stable, is so delicately poised that, after departure from it beyond certain limits, instability ensues... Such a disaster is somewhat like the ‘capsizing' of the ship which, under ordinary conditions, is always near stable equilibrium but which, after being tipped beyond a certain angle, has no longer the tendency to return to equilibrium, but, instead, a tendency to depart further from it.”
Senator Obama's first task is to stabilise the depression before it passes the tipping point, as it did in the 1930s. He rightly recognises how urgent this is. Yet he has one great advantage. He is genuinely a charismatic leader whom people will follow. The economic crisis calls out for a renewal of confidence. The whole world needs to believe that “Yes, we can”.