Herbert Hoover's Ghost Haunts Markets, Democrats

March 19 (Bloomberg) — No question, Bear Stearns Cos. evokes the crash of 1929 and the Great Depression that followed it. Politicians are already making analogies to Herbert Hoover, the demon of that period, and Franklin Roosevelt, the angel.

On March 16, Senator Charles Schumer of New York said on television: "We're in the most serious economic problem we've been in a very long time — much worse than 2001. The president's hands-off attitude is reminiscent of Herbert Hoover in 1929 and 1930."

Within 24 hours, Representative Rahm Emanuel, an Illinois Democrat, was weighing in with his own 1930s comparison. Roosevelt had pulled a country out of Depression and united it; President George W. Bush was doing the opposite, he said.

You get the picture: Bush is like Hoover, the do-nothing. Democrats are like Roosevelt, the activist.

It's worthwhile to go back to that Depression period to see what people actually did or didn't do and who resembles whom. The reality differs from the cartoon.

Come October 1929, and the first big drops in the Dow, President Hoover pleaded for market confidence. "We are undoubtedly in a plane of prosperity, and we wish to hang on to prosperity," he told the New York Times.

On March 14, Bush made a similar pitch before the Economic Club of New York: "We're a resilient economy, and I believe that the ingenuity and resolve of the American people is what helps us deal with these issues." So far, so Hoover-ish.

Housing Bailout Anyone?

To help homeowners and homebuilders, Hoover created the Reconstruction Finance Corp. Together that agency and the states poured billions of dollars into helping troubled banks and farm mortgage associations. Here, too, Bush, with his FHA Secure and other mortgage projects, recalls Hoover.

Yet Hoover made other moves — he was more of an activist than the stereotypes about him allow — and they resemble Bush policies not at all.

Hoover was a mining engineer, and to him the most real wealth was wealth in the ground — copper, gold, coal.

He distrusted financial markets as ephemeral. When Wall Street crashed, he blamed the messenger. Specifically, he spent the early 1930s chastising short-sellers.

"Bear raids," he scolded, were "not contributing to the recovery of the United States." The president sought new restrictions on short-selling, pressuring officials from the New York Stock Exchange to the Chicago Board of Trade to curtail the practice. This meddling caused more uncertainty.

Schumer the Hoovermonger

Who is doing such pressuring these days? Not Bush, but that Hoovermonger, Schumer. Schumer used the Bear Stearns collapse to call for "a greater degree of regulation" in the industry that is relevant this time, investment banking.

Hoover knew free trade was beneficial. But his party, the Grand Old Party, was the tariff party. So in spite of himself, he signed a big new tariff, the Smoot-Hawley act, triggering retaliation from U.S. trading partners.

For many decades now, Democrats have contrasted Hoover's concession to protectionists unfavorably with free-trade legislation written by Roosevelt and his globalization guru, Secretary of State Cordell Hull.

Today it is the Democrats who are doing wrong, and they know better. Candidates Hillary Clinton and Barack Obama are both internationalists by temperament, yet they seem to be in a race to see who can repeal the North American Free Trade Agreement first.

Channeling Hull

Bush, by contrast, was channeling Hull when he called a plan to reject a new trade accord with Colombia "a terrible signal."

Finally, there was Hoover's tax policy. Today every fool, right or left, knows that imposing a tax increase in an economic downturn is like kicking a wounded man in the stomach.

Yet in the dark days of 1932, with unemployment at 20 percent, Hoover perversely signed an increase that reversed the multiple cuts by his predecessor, Calvin Coolidge.

Hoover more than doubled rates at the bottom of the tax schedule. He also increased the top marginal tax rate to 63 percent from 25 percent. The effect was predictable. That tax error has haunted economists ever since.

Yet today it is not Republicans but Democrats who are preparing to replicate it. Obama has suggested a payroll tax increase and an income tax increase; together they would just about offset all the breaks created by Bush. Clinton is scarcely different. Who's Hoover now?

All the Hoover-izing has obscured a disturbing resemblance — that of Bush to Roosevelt on currency. FDR knew that the dollar needed reflating, but monetary policy wasn't his area, so he was at a loss for a method.

Reflation Machine

At one point, he even tried to turn himself into a one-man reflation machine, buying commodities — each morning at a different price — in the hopes of moving the greenback.

His uncertainty kept the market down in the fall of 1934. You don't hear Democrats these days racing to claim the currency component of the Roosevelt legacy.

Bush, too, is no dollar expert. He has bumbled his way to trouble on money. The one risible line in his presentation last week was "we believe in a strong dollar." You can't say that after all the drops in the currency that Bush and Treasury Secretary Henry Paulson have allowed.

So the 1930s have plenty to tell us, yes. But the real challenge isn't deciding who resembles Hoover. The challenge is for both parties to figure out how to avoid a whole era of mistakes.

(Amity Shlaes, a senior fellow in economic history at the Council on Foreign Relations, is a Bloomberg News columnist. The opinions expressed are her own.

© Copyright 2008 Bloomberg

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