If You Still Have Money In Your Wallet, Read This
Jan 22nd, 2009 | By James Dale Davidson | Category: Abundance|
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The More Things Change… ‘Tis time, there must be a line of separation between honest Men & knaves, between respectable Stockholders and dealers in the funds, and mere unprincipled Gamblers.
If you still have cash in your wallet, you will recognize Hamilton from his picture on the ten-dollar bill. As America’s first Treasury secretary, he is honored for his role in launching the U.S. currency. During the Civil War, his reputation was even more "on the money." Lincoln put Hamilton’s portrait on the $2, $5, $10 and $50 notes. Incoming Treasury secretary, Timothy Geithner, would do well to look to Hamilton for inspiration as he tries to do the impossible: re-inflate a bubble that has burst. It can’t be done. But Hamilton went about as far as anyone in draping the banner of success over improvised interventions designed to jump-start a lagging economy. In his stint as Treasury secretary, Hamilton faced a panic caused by the bankruptcy of William Duer, a speculator Hamilton had appointed the first assistant secretary of the Treasury. Hamilton orchestrated a rapid intervention. He ordered the Treasury to buy several hundred thousand dollars worth of federal securities to support the market, and he urged banks not to call in loans. Soon, calm returned. According to historian John Steele Gordon, "It would be 195 years, until the great crash of 1987, before the federal government once again moved decisively to prevent a panic." A Lesson from History Of course, a crucial difference between Hamilton’s tidy response to the panic of 1792 and the situation today is that Hamilton was starting from rock bottom in an economy with few financial assets, little debt and very little circulating money. In fact, it takes an act of imagination to recognize how primitive the U.S. economy was when Hamilton joined Washington’s first cabinet on September 11, 1789. As difficult as it is to believe, at this time the United States was poorer than Haiti. Hamilton faced no little stock of problems, however, as he tried to move the economy towards prosperity. Among other things, the new country had no financing apparatus in place. There was little or no mechanism of credit to support commerce and industry. There was also a need to formulate rules to govern the eighteenth-century version of market speculation. (This was organized, appropriately enough, in taverns, where most of the early trading of shares and notes took place.) Hamilton was a great pioneer of American commerce. He founded The Bank of New York in 1784. He was also the founder of the U.S. Coast Guard and the New York Post newspaper. These are considerable accomplishments for a man who was also a military hero. During the American Revolution, Hamilton was George Washington’s chief of staff, in which capacity he organized the Continentals’ intelligence services. He also commanded an infantry assault that captured a British stronghold at the Battle of Yorktown, the battle that effectively ended the Revolutionary War. And after leaving the Treasury, Hamilton served as the "Senior Officer of the U.S. Army" with a rank of major general. Hamilton, who was the first delegate selected to the Constitutional Convention, also became a prominent constitutional lawyer. He was the principal author of the Federalist Papers , writing 51 of those 85 famous essays. By comparison, Geithner is a piker. A Taxing Issue He has never started anything to speak of, except a minor fuss in Congress when the distinguished members discovered that he had done something quite enterprising – something akin to tax evasion. Although he has been employed by government all his adult life, he somehow neglected to pay $42,702 in self-employment taxes while working at the International Monetary Fund from 2001 to 2004. Now he’s President Obama’s choice for Treasury secretary, which would put him in charge of the IRS. I don’t know about you, but I find it somewhat encouraging to see signs that Geithner might not be a tax-collecting zealot. Let’s hope he’s not. Unlike Hamilton, Geithner has been served an alphabet soup (TAF, TSLF, PDCF, TARP, AMLF, CPFF, TLGP, TOP, MMIFF, TARF) of Treasury and Fed programs to reliquify a financial system gagging on excessive debt. When Hamilton launched the Bank of the United States to finance an eighteenth-century economy, which had only limited and primitive mechanism of credit, it was reasonable to surmise that every dollar of available credit would have a multiplier effect on economic activity. In fact, each dollar of new debt may have generated two dollars or more of economic activity. Of course, there were no statistical agencies in the new government to capture such data. So we can only guess. But during my lifetime, statistics have become available to record the declining utility of debt in stimulating the economy. In the 1950s, when I was a child, each dollar of new debt resulted in $0.73 in GDP growth. By the 1980s, however, the efficiency of new debt in stimulating economic activity had halved. Each dollar of debt resulted in just $0.34 in GDP growth. In the current decade of runaway credit explosion, the stimulative effect of new debt has halved again. Each dollar of new debt now generates just $0.19 of economic growth. Of course, these figures (the latest available as of June 30, 2008) don’t tell the final tale. During the second half of 2008 debt exploded, with trillions of dollars in bailouts widening budget deficits to an incredible degree. The chairman of the Senate Budget Committee says the deficit for the fiscal year ending this fall will be at least $2 trillion. Furthermore, GDP is rapidly falling. And we could see as little as $0.15 of economic growth for each dollar of new debt for the decade. The Bailout Boys Given this unfavorable arithmetic, Geithner faces a much more daunting problem than Hamilton faced. The new nominee not only has to help clean up Wall Street, he also has to find a way to make debt stimulate rather than anesthetize the economy. Rumors suggest that one of Geithner’s ploys will be to create a "bad bank," an official financial institution whose job will be to warehouse bad debt. Like medieval porters stacking corpses at the church door after a visit by the Black Death, Geithner and his band of bailout economists intend to inter the casualties of the "Plague of the Black Debt" to avoid infecting the balance sheets of healthy banks. It will be an adventure to watch. Someday centuries from now someone may write an entertaining historical novel that weaves a story about Geithner and his exploits as entertaining as David Liss’s The Whiskey Rebels , an historical fiction that features Alexander Hamilton as a central figure in an entertaining yarn. One reviewer described it this way: "A breathtaking, breakneck tale from the interwoven viewpoints of a top revolutionary spy and a brilliant and cunning woman who becomes both his ally and nemesis. This is the powerful portrayal of an era of rampant, freebooting capitalism run amok that lay at the dawn of – and could have destroyed — the new American republic." Rather than waiting many years for someone to concoct a tale about Geithner and the bailout boys as compelling as this, I suggest you step back a couple of centuries and read The Whiskey Rebels . You will find a well-drawn tale in which fascinating characters face dilemmas as modern as today’s headlines. Although it is hardly an inspirational novel, The Whiskey Rebels shows two clever protagonists who find ways to rebound from hardship. Both embody "outside the box" thinking.
James Davidson Editor, Abundance
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