Saturday, October 20, 2007

Where Have I Seen This Before? Remember Hoover's National Credit Corporation?

Reuters published this article on October 15, that brings back memories of the 1930s. According to the article, "Major banks including Citigroup Inc are looking at setting up a roughly $80 billion fund to buy ailing mortgage securities and other assets, in a bid to prevent the credit crunch from further hurting the global economy, sources familiar with the matter said." The article says that Citigroup, JP Morgan Chase, and Bank of America are in on these discussions, as are government regulators from various countries including the US.

The funds would be used to "bail out" SIVs ("structured investment vehicles," complicated financing instruments that would scare the pants off any CPA, but that some of our biggest banks have been trading with abandon).

According to a document published at the American Institute for Economic Research back in 1995 (EEB, September 1995), Herbert Hoover tried to get banks to do likewise in 1931 and form a private corporation (the National Credit Corporation or NCC), "to help banks in need and to loan against the assets of closed banks, so as to melt large amounts of frozen deposits and generally stiffen public confidence." [Quoted from Hoover's memoirs about the 1929 Great Depression.]

[Thanks to for the photo.]

Unfortunately, Hoover didn't stick to his guns about keeping the government uninvolved, but rather opened Pandora's Box by suggesting that, if his NCC idea didn't work out, he might restructure the WFC (War Finance Corporation) so as to take over for the NCC if necessary.

Well it didn't and he did. He restructured the WFC as the Reconstruction Finance Corporation (RFC), and that got warped by the New Deal into some of our back-up lender-of-last-resort institutions of today (the FDIC, PBGC, etc.)

What Hoover let out of that Pandora's Box was the Genie of the taxpayer as the ultimate payor of the errors of legislators and bankers. They will find it difficult to get that bad idea back into its box.

The G-7 is meeting this weekend. Will they discuss the present credit crunch? You bet. Is this making the markets nervous? Yup. Dow's down 350 points. That, plus the Pakistan, Kurdistan, and Iranian unrest is making for some unsettling times.

Thank goodness, the business cycle is still relatively strong, and all of this does not coincide with high unemployment and a negative GDP. But in the end, no one can predict this one, just as they couldn't predict any of the past sticky situations. We'll just have to ride it out like all the others.

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