Panic!: A History of Financial Crisis
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Speculation…deregulation…crash…bailout. Sound familiar? Probably. Sound modern? It shouldn’t. Financial panics have occurred regularly throughout American history, and each time we were left holding the bag when the bottom fell out of the market and banks called in their debts. Why do we think we’ll ever beat the business cycle? On this week’s show, economic historian Michael Bernstein says you can’t have the boom without the bust. Then historian Scott Nelson outlines the eerie similarities between 1873 and 2008, and explains how Christian fundamentalism is rooted in financial collapse.
I’d like to know more about the history of the nationalization of the banking system. From what I’ve read, it seems that in general, the most major response to the crises of past has been to create some kind of a nationalized banking system (or further nationalize it, once the first two national banks failed) and attempt to stabilize currency/markets. How is it that the current nationalized monetary system has existed for so much longer than the previous ones? What is the true history behind the relinquishing of the gold standard? What were the arguments for and against the creating of a central bank, national currency, and relinquishment of the gold standard when they happened? Since the current central banking system and system of basic regulations are the only ones that have lasted more than 50 years, the crisis of 1913 and the great depression seem to me to be the most relevant to current times. The current prevailing argument (from both Bernanke and Paulson) is based in great part on Freidman’s arguments that the Fed did not do enough, and did not control the markets well enough. Why didn’t they? What were the arguments against further nationalization and more control of overall currency flow at the time?
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Love the show. One of the largest reasons I miss being in school is because I can’t walk into a department and ask questions like this from people who have devoted so much time and effort to a specific subject. Thought of more questions though, so I’ve gotta ask.
Historically, the labels of capitalism/socialism/marxism are fairly new. How did these theories come about? When were they accepted into economic debate/policy? What were the arguments for and against economic policy before they were introduced into the world? How did the political landscape change as economic theory developed, and the “ism’s” were created?
When did the Democrats get the “tax and spend” label, and the Republicans the “smaller government, less taxes” label?
Since they came into play, have the above labels held true?
How, when, and why do paper markets (stocks, bonds, currency, etc) come into play?
The stock market in particular seems to be one of the most publicly watched financial indicators since the crash of 1929 and subsequent depression. Has it been an accurate thermometer for the national economic climate? How have responses to economic crises changed since the markets came into play?
What is the history of the rating agencies (ie. S&P and Moody’s)? Who created them, why were they created, and what was their initial purpose?
QuoteI’d like to hear more about the historical politics surrounding the other panics. Where those events the major factors in shaping the banking regulatory system we have today, or were there other major elements that were not panic related?
Has the recent nature of finance changed in response to the development of computer technology such that a regulatory landscape shaped during earlier times is no longer a good fit?
QuoteWhat does history say about the people who stuck out the panic? What about those who dumped their fortunes due to panic? And finally what about people who actually bet that things would get better by investing during the crisis?
QuoteI think that the story of how we don’t trust either the political realm or the free market to regulate the market is a facinating story. The Bank of America and the need to have some sort of banking system for the country was one of Washington’s biggest issues to address in his presidency and it led to the creation of two political parties. But trying to create a stable banking system that met the needs of the country also created huge political issues. By the time that Jackson came along, animosity towards a central bank was huge and the question of how to provide banking once again split the country and created another political party (the Whigs). We then let the free market do it for a while, which led to all sorts of bank panics and bank runs. In fact, the system was fundamentally set up in a way that created bank runs and bank failures. Then we went back and created a regulated free market system and that didn’t work either because political control of the banking system also led to bank runs. Then we created the Fed, which is neither under market or political control but is supposed to be above both influences to professionally manage the economy, which was supposed to make this better. And it worked for a while until the Fed basically made the Great Depression worse. But since then, we have been able to avoid these to some degree because of the Fed and its ability to manage the economy separate from political or market influence.
Personally, I don’t think you can talk about the history of bank runs, crashes and panics without telling the story of how to manage the banking system also. It also makes a good story.
The social concequences of this history are profound. In one way, the question is really about the flow of wealth in the country. When the Fed jacked up interest rates in the 1980′s, it resulted in a huge flow of wealth away from the extremely wealthy. In its keep inflation low period, it has shifted that flow back to the rich. I think that there is no more profound social imact than this. But it is an impact that most people don’t get. And I think it is critical for now because we need to think about how wealth will flow in this market crash also. Does this mean that there will be a shifting of wealth in our society so it is more dispursed? Or does it mean more concentration of wealth in fewer hands as the truely wealthy are able to accumulate more assets at fire sale prices (Warren Buffet?).
QuoteBuddy Can You Spare a Dime?
Our economic policies have been geared toward controlling inflation for a long time. So long that I find my students (I teach US Hist at Columbia College in Sonora CA) unclear on the problem of deflation. Perhaps some discussion on the problems that deflation caused the average person would be helpful to more folks than just my students.
Great progam guys! I listen to the podcast as almost the same day it comes in.
Daniel Nestlerode
QuoteI noticed with this financial crisis that in email forwards I received from those of a conservative bent minorities were blamed. The whole problem was not wall street pursuing unethical business practices, but liberals giving too many loans to black people, which they then foreclosed on.
Now, obviously this financial crisis has myriad reasons behind it, including defaulted loans. But I was struck by how quickly the whole mess was laid only at the feet of “irresponsible” African Americans and other people of color. (Liberals are not excluded from falsely laying the blame, but I am more intrigued by this line of thinking)
My question for you is, what was the blame game following other financial crises? Were minorities blamed then as well?
QuoteLauren (roses_supposes),
Great to hear from you again, and thanks for your review on iTunes! It’s funny you should bring this question of minorities and the blame game up–I recently spoke with Scott Nelson, a professor of history at William and Mary, who is researching and writing about the Panic of 1873. During our conversation, he mentioned some interesting parallels between the reaction to that panic and the reaction to this one, one of which closely pertains to your point. I’ll paraphrase him: After the panic–which began when a building boom in Europe burst and banks began closing doors (sound familiar?) and soon spread stateside–there was great confusion and turmoil. In Europe, however, the Rothschilds, a group of conservative Jewish bankers, and a few other very conservative banking houses, managed to do OK despite the crisis. As a result, many blamed Jews for their financial woes, even suggesting that Jews had engineered the crisis. It was a classic case of scapegoating that fed into myths about Jews that many Europeans had at the time (they were secretive, hoarded money, etc.). Initially, some mayors in the Austro-Hungarian Empire began saying that Jews shouldn’t be able to vote; it took about five years for the anti-Semitic mutterings to become an organized campaign in Russia, where the czar sent out agents who blamed the Jews for the crisis. The pogroms started in the 1880s as crowds rushed into shtetls and burned houses, driving people out of their homes. As Nelson explained to me, there are many fascinating parallels between the Panic of 1873 and the current one, but this particular similarity warns us of the dangers of scapegoating when times are hard. Thanks for raising this excellent point, Lauren. (And thanks to Scott Nelson, who we’ll be hearing from on the show.)
Catherine
Quote(Assistant Producer)
Under the premise of national security, the government has often stuck its nose into the private sector. I’m thinking of WW1 when railroads were seized. They were taken in the name of the national interest and to keep goods flowing in the marketplace. In 1920, they were returned and private owners were fairly compensated. Certainly, Truman’s seizure of steel mills is well-known, but lots of industries finally found themselves under governmental control (including some retail stores like Montgomery Ward). In my book, financial institutions are no different from these industries. It’s simply a matter of what is the “essential” industry of the time. Then, it was railroads, now it’s the financial services industry.
Has this led to the demise of capitalism as we know it? Well, no, no exactly. As a libertarian-leaning person, I’m weary of many government actions from the outset, but history is telling me that this might not be so bad after all. It seems cyclical. There is a swinging pendulum back and forth for government action in the financial sector. We’re swinging into it now, but in due time, the pendulum will swing right back in the other direction.
QuoteFollowing up on Logan’s comment, the new age of \national security-bases\ for intrusion in private finance comes through the regulation of capital. The rise of sovereign wealth funds has been a hot topic amongst congressional leaders as of late, but the focus has largely been on SWFs as strategic threats rather than as valuable partners during the subprime crisis. It should be noted that SWFs provided a substantial amount of liquid capital to American and European private banks and investment institutions during the past year, but Congress and the EU still insist on regulating them. The justification is usually that most of this capital originates in the middle east or China and therefore there is greater chance of a national security risk.
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