In the topsy turvy world of Washington, to combat what is being called the most momentous financial crisis since the Great Depression, the Republicans have gone socialist and the Democrats are advocating the corporatism of Italian rightist dictator Benito Mussolini.
Fairly unique in U.S. history, the Bush administration has nationalized companiesinsurance and mortgage guarantorsthat have nothing to do with the war the country is fighting. During World War I, President Woodrow Wilson had the government seize and operate the railroads because they were deemed vital to producing war materiel for the troops. They were returned to private hands in 1920, two years after the war ended. Congress also gave Wilson the authority to seize and operate other industrial plants during the war, but took away this power when the conflict concluded.
During World War II, FDR declared a state of emergency and seized factories that were threatened by strikes. Congress ratified these seizures by passing the War Labor Disputes Act, which allowed the president to commandeer industrial plants and use them to produce war materiel. The Depression-era Reconstruction Finance Corporation was expanded, in a fit of war socialism, so that the government could provide items deemed key to the war effortfor example, petroleum distribution and rubber production.
In 1945 and 1946, under his explicit wartime authority as commander in chief, Harry Truman seized the railroads and coal mines and had the government operate them. In 1952, after this wartime authority had expired, Truman attempted by executive order, under what he called his inherent power as commander in chief (which George W. Bush has even more broadly claimed), to seize and operate steel mills during a strike. He claimed that he was doing this to prevent a paralysis of the national economy and used the rationale that soldiers in the Korean War needed weapons and ammunition. The Supreme Court, however, struck down Trumans executive order, saying that it had no basis in the Constitution or statute. Thus, the Supreme Court essentially ruled that the president was commander in chief of the armed forces, but not the nation.
Although not constitutionally at warsince the required declaration of war was not obtainedBush could argue that the companies he nationalized were critical to the war effort. Of course, everyone would laugh at the idea that home mortgages have anything to do with the wars in Iraq and Afghanistan. Even if they did, Wilson and FDR had or later got congressional authority for their wartime actions. Bush unilaterally and unconstitutionally socialized these companies for no good reason.
In addition to socializing AIG insurance company and Freddie Mac and Fannie Mae mortgage guarantors, Bush has bailed out investment bank Bear Stearns, while inconsistently letting the investment bank Lehman Brothers go under. This resembles Teddy Roosevelts favoritism of one company over another in trust busting.
Finally, Bush originally proposed giving the Treasury Secretary unprecedented power, with little oversight, to use a whopping $700 billion of taxpayers money to buy up financial institutions bad debt. When asked how the administration arrived at the $700 billion number, one anonymous administration official admitted that they had no analysis behind that number, but just wanted to make it big as a signal to the market (presumably that the federal cavalry was on the way with a massive welfare check for Wall Street). This resembles FDRs and Lyndon Johnsons lack of analysis before throwing money at the Great Depression and poverty during the 1960s, respectively, just to show they were doing something about the problems.
Although President Bush likes to liken himself to Ronald Reagan, his presidency most closely compares with prior Democratic chief executives during wartime. As noted above, his socialism may be even worse than that of Woodrow Wilson and FDR because it has nothing to do with the wars he is fighting. Furthermore, he has increased domestic spending more than any president since Lyndon Johnson during the Vietnam era. But what would we expect from a Republican Party that--all of its grandiose small government rhetoric aside--was originally created as a big government party and, in all of its history, has advocated smaller government only during the Warren Harding and Calvin Coolidge administrations?
Meanwhile, in critiquing Bushs bailout plan by insisting on taxpayer ownership in failed companies in order to profit if they turn around, the Democrats, pretending to be on the left, have adopted the corporatism of Italian dictator Benito Mussolini. Such public-private cooperation and interweaving was originally adopted during Woodrow Wilsons administration during World War I and was the basis for the National Industrial Recovery Actthe original centerpiece of FDRs New Deal--which was ruled unconstitutional by the Supreme Court.
Neither Republican socialism nor Democratic corporatism is the answer to the current financial crisis. The conventional mantra of the Democratic and Republican presidential candidates is that this problem was caused by a financial industry that was insufficiently regulated. In fact, the crisis was caused by previous government intervention and bailoutsfor example, FDRs bank holiday and the creation of the Federal Deposit Insurance Corporation during the New Deal and Bushs fathers massive bail out of the Savings and Loan banks during the late 1980s and early 1990s. If the financial sector is regarded as too important to have difficulties or if particular financial institutions are regarded as too big to fail, they will engage in reckless practices that will end in crisis, thus leading to demands for yet more government action to fix the problems that prior government intervention caused.
This downward spiral must be broken. Financial institutions must be allowed to fail, and the market must be allowed to return to equilibrium. Such failures might very well induce a recession, but as Herbert Hoover discovered, throwing more credit at a market with excess credit only worsens the inevitable economic downturn. Lets just hope the ill effects of this massive financial bail out dont get that bad.
Ivan Eland is Senior Fellow and Director of the Center on Peace & Liberty at The Independent Institute. Dr. Eland is a graduate of Iowa State University and received an M.B.A. in applied economics and Ph.D. in national security policy from George Washington University. He has been Director of Defense Policy Studies at the Cato Institute, and he spent 15 years working for Congress on national security issues, including stints as an investigator for the House Foreign Affairs Committee and Principal Defense Analyst at the Congressional Budget Office. He is author of the books Partitioning for Peace: An Exit Strategy for Iraq, and Recarving Rushmore.
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