Herbert Hoover converted a mundane recession into the greatest economic disaster in modern historythe Great Depression. Unfortunately for all of us, George W. Bush is headed down that same path.
Periodic recessions are the necessary price for the bountiful harvest of the capitalist system. People and businesses are not perfect, and supply and demand get out of whack every so often. If there is no interference from government, in time, the market will right itself back to equilibrium. Because supply temporarily exceeds demand, wages, prices, business investment must drop to restore equilibrium.
However, since Hoovers timeironically partly because of the monstrous economic catastrophe that he wroughtAmericans expect the government to come galloping to the rescue in any economic slowdown. Somehow they expect the government to be more perfect than the admittedly imperfect marketafter all, the private sector has gone askew. Yet because the government is gambling with other peoples money and private businesses are using their own, markets, rather than bureaucrats, usually make better economic decisions.
Presidents, legislatures, and the public in the 19th century recognized these facts and did not expect the government to interfere in the economy in vain attempts to correct economic problems. They knew that the market would self-correct as it always had.
Today, Americans routinely expect politicians to make the economys ailments better and bail out businesses and citizens for bad economic decisionsan expectation created by Woodrow Wilsons massive government meddling in the U.S. economy during World War I and Hoovers and his successor Franklin Delano Roosevelts (FDRs) interventions later on. Thus, in that spirit, the conventional wisdom nowadays is that too little was done by Hoover about the economic downturn until FDR saved the day with massive government intervention.
In fact, Hoover did too much about the recession and things went downhill from there. Instead of letting wages, prices, and investment fall to restore equilibrium in the market, Hoover pushed businesses to keep wages and investment high, despite falling demand for their products. He created public works programs that also kept wages artificially high and signed a draconian hike in tariffs that declared economic warfare on the world. But most important, Hoover flooded the market with credit even though excessive increases in the money supplymostly during predecessor Calvin Coolidges one-and-a-half termshad created conditions in which businesses had been tricked into a sense of false prosperity and thus had undertaken excessive investment. The reduction of that bad investment had led to the recession in the first place. Now Hoover was trying to artificially pump up the economy, which made the inevitable economic malaise even more dire. FDR then came into office and continued Hoovers government intervention into the marketplace on a massive scale. The market was never allowed to right itself until resources were returned from the public to the private sector after World War II ended; only then was prosperity restored.
The same mistake by Hoover is being repeated now. Initially, Alan Greenspan followed the laudable tight monetary policies of Paul Volckerappointed by Jimmy Carter and responsible for the prosperity of the Reagan years after an initial recessionand assisted in the prosperity of the Clinton years. Toward the end of his tenure at the Federal Reserve, however, Greenspan began to sow the seeds of the current crisis by providing more cash to the economy. Ben Bernanke has continued this ill-advised monetary expansion. In an economy already flush with cash, the government is worried that people and businesses wont get enough credit to spend the economy out of its doldrums; it is now socializing or bailing out the financial institutions that made bad loans and is buying up bad debt itself to pump up the credit markets. This massive artificial infusion of cash into the economyat the possible staggering cost of $2.3 trillion (approximately the budget of the gargantuan federal government for an entire year)provides welfare to the wealthy and makes it that much harder for the market to right itself. In other words, government action may very well have turned a sluggish economy into a catastrophic tailspin, ala Hoover and FDR.
But at this point, the deed is done and the market will just have to struggle to right itself. We can now just refer to Washington as Hooverville. Unfortunately, U.S. government intervention into the market has shamed other countries into bailing out their own financial sectors, probably spreading this cataclysm to other nations. But governments should avoid further bailouts or well end up in a depression that could last years.