Herbert Hoover/Andrew Mellon - Let The Incompetent Banks Burn! The Politically Easy Answer

[Median Democrat]

I was listening to some of the hearings today, and a Republican congressman from Georgia used the hearing as an opportunity to rail against governmental bailouts of financial institutions. I kid you not, he complained about government intervention, then said that the government should demand accountability from corporations. While many folks are piling on the Obama administration for the bonus issue, keep in mind that the AIG bailout WHICH BEGAN UNDER BUSH, is politically unpopular. Its even more politically unpopular because it happened under Bush's watch. The easy short term politically expedient answer is to let the banks fail. Afterall, that's what Herbert Hoover did:

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Letting the Banks Fail
A few banks had failed in the fall of 1929 but it was nothing out of the ordinary. About 70 banks had failed every year in the 1920s. Numerous rural banks had failed throughout 1930, over 700 in all, but nobody worried about that. Then on December 11, 1930, the Bank of United States failed. Primarily serving immigrants in New York, it was a Jewish-owned bank. The establishment thought that it could draw a ring around the bank and its portfolio of second mortgages, but it could not. The contagion spread, the stock market fell, and in 1931 banking failures began in earnest. Many of the failing banks were state-chartered banks and outside the Federal Reserve System. Officials hesitated before assisting them, and so they failed, and their failures contracted the money supply. By the nadir of the depression thousands of banks had failed in the United States, and the money supply had contracted from $46 billion in 1929 to $32 billion in 1933.

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The expressions of outrage, in my opinion, are largely misdirected at the bonuses when they should be focused more broadly on (1) the decade of deregulation that precipitated the AIG crisis and (2) the issue of executive compensation. Republican knee jerk popululism is just an effort to distract from the real causes of this crisis. Perhaps we would be happier in the short term if Geithner echoed the words of Andrew Mellon, President Hoover's Treasury Secretary, and let the banks burn:

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Secretary of the Treasury Andrew Mellon advised President Hoover that shock treatment would be the best response: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.... That will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people."

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