Need New New Deal
by George W. Liebmann
Issue 129 - April 8, 2009

Anyone contemplating the Obama administration’s approach to the financial crisis must be impressed by the continuity as respects both policy and personnel with the two administrations under which our economic crisis gathered steam. The Secretary of the Treasury was head of the New York Fed during the Bush administration; the principal economic adviser was Secretary of the Treasury under Clinton; the Attorney General was Deputy Attorney General under an administration that gave us massive expansions of federal criminal jurisdiction and the ‘drug war’; the Secretary of Defense was Bush’s Secretary of Defense; the Secretary of State was Clinton’s wife, and so on.

President Obama promised change, but his is no New Deal. In 1933, the officials who acquiesced in the Smoot-Hawley tariff, were replaced by Secretary of State Cordell Hull, the nation’s leading free trader and the architect of the Reciprocal Trade Agreements Act of 1934. The restrictionists at the Federal Reserve gave way to one of the bitterest of their critics, Marriner Eccles, a Mormon banker from Utah who was nevertheless a premature Keynesian. The big stick in Latin America gave way to Sumner Welles and the ‘Good Neighbor’ policy. After a centralizing, nationalist and collectivist interlude, the acolytes of Justices Brandeis and Frankfurter were given power, giving rise to the Securities Exchange Act and its curbs on insider and margin trading, the Public Utility Holding Company Act, a decentralized unemployment insurance system, banking regulations limiting permitted investments, interest rates and cross-ownership, and an antitrust campaign.

The essentially lawless NRA and RFC were superseded by a capitalist system supervised by publicly accountable administrators. It is forgotten that Dean Acheson, one of Brandeis’ acolytes, presided over the committees that prepared both the Administrative Procedure Act and the Federal Rules of Civil Procedure. Brandeis had been inveighing since 1914 about "Other People’s Money and How the Bankers Use It." His last important decision restored the power of state courts over tort and contract common law, and at the close of the Roosevelt and Truman administrations banking, insurance, public utilities, the enforcement of the criminal law, education, and moral and social issues were largely under state control. There were fewer federal prosecutors and policemen in 1952 than in 1933.

To have been right about the Clinton-Bush economic policies is for some reason an effective disqualification for service in this administration. Those who saw the derivatives disaster coming, including the writer Michael Lewis, whose Liar’s Poker (1990) bears the same relation to our time as Henry and Charles Francis Adams’ Chapters of Erie bore to the Gilded Age are nowhere to be found in this administration’s councils. Also absent among the prophets are the financial journalist Martin Mayer, the foreign-based commentators John Gray and William Pfaff, and the former chairman of the Commodity Futures Trading Commission, Brooksley Born. The regulators who bravely faced up to earlier problems, including Paul Volcker and Robert Glauber (who presided over the decisive but painful liquidation of the savings and loan crisis) have been marginalized; the same is true of Richard Fisher, the Governor of the Federal Reserve Bank of Dallas, who dissented from the loose credit fueling the real estate boom. These people have independence of mind, a sense of history, and intestinal fortitude.

Six months into the crisis the response of two administrations has consisted of secretive and ad hoc bail-outs and the promiscuous proliferation of federal guarantees with all their perverse incentives and moral hazards against which Chancellor Merkel has warned. No curbs have been placed on bare options trading, no measures taken to limit up-front fees, teaser and fluctuating mortgage rates, consumer finance interest rate abuses, or the conglomerations of financial institutions, let alone foreseeable and pyramiding federal deficits. Steve Forbes, not widely thought of as a New Dealer, has called for restoration of the uptick rule governing short sales, the prohibition of naked short selling, and restoration the earlier rules governing valuation of mortgages. Martin Mayer, no opponent of free markets, has suggested restoration of moderate transfer taxes as a means of moderating extreme volatility and 'casino capitalism.'It will require intelligible rules governing future behavior, informed by a moral compass, to restore market confidence. This is not going to be supplied by improvisations conducted by ticket-punchers.

The writer, a Baltimore lawyer, is the author of Diplomacy Between the Wars (Palgrave Macmillan 2008) and The Common Law Tradition: A Collective Portrait of Five Legal Scholars (Transaction Publishers 2005).