Bill Moyers posed the exact right question last week: “Is it time for a commission to investigate today’s Wall Street crash?” He also invited his listeners to respond to the question: “What would you ask new Pecora hearings to investigate?”
A mere glance at today’s New York Times offers plenty of reasons for a modern “Pecora Committee” to investigate the causes of the Crash. As I write, the lead story at the Times Website informs us that, “U.S. Economy in 2nd Straight Quarter of Steep Decline,” with GNP shrinking at a 6.1 percent annual rate, “worse than economists predicted.”
The print edition of the Times today carried the no longer startling news that unemployment has grown from 11.1 million in December to 13.2 million in March. Meanwhile, the lead story in the Business section announced that, “Feeling Secure, Some Banks Want to be Left Alone.” What that means, of course, is that the bankers want to go back to giving themselves whopping pre-Crash bonuses; continue to rip-off credit card consumers with fine print and surprise rate increases; and haven’t the least intention of letting their Congressmen change the laws to allow a bunch of bankruptcy judges to modify the mortgage terms of desperate homeowners.
Any why should they?
As the economist Simon Johnson—a guest on Moyers’ Friday night program—keeps reminding us at his blog, The Baseline Scenario, the nation’s Banking Culture has all but overwhelmed its political culture. Like any true Third World country, the United States of America is in the grip of a banking elite. It matters not that the same elite recently led the entire world to the edge of the abyss.
The myth of the Banking Culture—“Too Big to Fail,” too powerful to be joined in battle—lies at the heart of the crisis we face today.
The need to shatter that myth is why the times demand a modern Pecora Committee.
First, though, let’s examine the origins and context of the original “Pecora Committee.”
Consider. By 1932, almost 13 million Americans were unemployed. That, incidentally, is the same number as today, though measured as a percentage of the population (125 million at the time) the situation was far graver still then. Of course, by 1932, the economic crisis was three years old—and had only deepened over time. The Crash of 1929 had led to the Depression. Government, meanwhile, was all but paralyzed.
Contrary to the faux-revisionist views of the Wall Street Journal editorial board and my old friend Amity Shlaes, Herbert Hoover was hardly an economic interventionist. The reality, as Ron Chernow tells us in his excellent “The House of Morgan,” was just the opposite. Hoover, Chernow notes, “refused to renounce economic orthodoxy and mount a vigorous attack on the Depression.” Rather than act, the dour Hoover preferred to sit and stew.
At least we don’t have that to deal with today.
When Hoover did act, it was to create the Reconstruction Finance Corporation (the RFC), which, in Republican hands, proved, as Chernow says, “a major boon to the Morgan interests,” making loans “to banks, railroads, and other hard-pressed businesses.” The once mighty railroad barons, the feckless Van Sweringen brothers, —deeply indebted to Morgans—borrowed $75 million from the RNC. Needless to say, the bank didn’t object to that government bailout.
By the autumn of 1932—with the presidential election on the horizon—Hoover, as Chernow says, “presided over one last humiliation—a nationwide banking crisis.” The fact was that the past three years’ deflation had eroded the collateral behind loans. (Does this sound familiar to anyone?) The banks called in the loans—all too like the banks of today with their unyielding attitude towards modifying home loans—with the result that the slump only worsened.
When Franklin Roosevelt trounced Hoover in November, the bankers—the big bankers, the Wall Street bankers—did not, at first, go into mourning. Roosevelt, with his pedigree—Hudson Valley Dutch aristocracy, Groton, Harvard—was one of their own. So they thought.
Morgans advanced one of their own, the handsome Russell Leffingwell, for a high Treasury post under Roosevelt. A Morgan partner in the new administration would be, as Chernow says, “a litmus test of Roosevelt’s financial soundness.” (Does this not also sound familiar today?)
The reason Russ Leffingwell didn’t make it into the inner circle of a Roosevelt Treasury: The man Pecora, who would, more than anyone shatter the myth of the Twenties Banking Culture.
How this came about and why it came about will be the subject of my next post. Stay tuned. Meanwhile: Read your Chernow. View the Moyers program online. Check out “The Baseline Scenario.” And, above all, take time to ponder Simon Johnson’s “The Quiet Coup,” in The Atlantic.
That’s a start.
[This is part one of a series on The Pecora Committee and its modern implications.]