In an afterword to his 2005 novel STATE OF FEAR(1), Michael Crichton called attention to the sudden appearance and continuing use of “crisis” in the headlines of American newspapers. He attributes it to a deliberate attempt to keep the American people in a panic to pave the way for the growth of government powers and a transfer of legislative power from the Congress to “the experts” in the bureaucracy and the Universities.

During the Clinton and Bush administrations we have faced a constant stream of these crises. The Social Security crisis, the Global Warning crisis, the Terror War crisis with its stepchild Iraq crisis, followed by the Iran nuclear crisis. And now the Financial Meltdown crisis.

The curent problems in the financial services industry are real and they are serious. They were also predictable, preventable, and brought on either deliberately or thoughtlessly by the Bush and Clinton administrations and the Federal reserve under both Alan Greenspan and Ben Bernanke. And now the Bush administration and the Federal Reserve are using the 'crisis” to increase the power of the agencies which caused it.

After the election of 1994, which returned a Republican majority to the Congress in part because of a stumble by the stock market amd a fear of “stagnation of the economy”, the Federal Reserve began lowering interest rates. The move did revive the stock market, but the decline of the American economy and the loss of manufacturing continued.

In fact, for several years, the increase in stock market prices had been driven almost entirely by speculation, just as the stock market growth of the 1920s had been. The economist John Kenneth Galbraith, in his study of the great crash of 1929 pointed out, as speculative market–a “bubble”– can only end in a crash. If it crashes early, it is serious but manageable. But the longer it is allowed to go on, the greater the crash.(2).

In a market driven by speculation, the buyer of stock is not interested in deriving income from dividends or using his puchase as a way of securing his wealth. He is interested only in the fastest possible increase in value in the shortest possible time. A speculative market will continue to rise as long as the price is constantly increasing, that is, as long as there are other speculators who will buy your stock for more than you paid. The open domination of the stock market in the 1990s by “day traders” was a tell-tale sign that this was a “bubble” And when a the price stops rising, the collpase is not to a reasonable price but a complete collapse(3). In 1995, the Clinton administration and the Federal Reserve should not have lowered the interest rate, but instead endured a downturn to prevent the current crisis.

But the Federal Reserve went on lowering the interest rate. When the market stumbled again, it went on lowering the interest rate. The stock market did not respond, but a new “bubble” in the real estate market was created, and encouraged by the Bush administration and by the Federal Reserve, which went on cutting interest rates and encouraging banks and insurance companies, to engage in making or investing in increasingly risky loans and speculators and home owners to borrow money they knew they could not repay.

In this crisis, created by the Federal Reserve and the Treasury Department, the Fed and the Treasury have shown neither repentence nor a commitment to change their behavior. Instead they are continuing to offer the financial institutions low cost loans and asking for the power to fiddle with the economy some more without any oversight by either the congress or the courts([link edited for length]).

Two days ago, I wrote an article, “Crunch Time for the Candidates” in which I said that the declaration of this crisis and the demand that the Congress grant unrestricted power to the Federal Reserve and the Treasury Department, and the demand that congress act within days, were manufactured to commit the two major party candidates for President to the policies of the Bush administration. I said that it was time for the candidates to stand against an immediate bailout, to modify their promises if necessary, and to unite their respective parties behind them. Both have failed the test.

Senator Obama has issued a statement in which, while he offers some criticism, assumes that the Bush request, with minor tweaking will be passed and does not imply a serious investigation of the causes of the crisis before major new powers are granted to the Federal Reserve and the executive branch. Instead of offering meaningful alternatives (including doing nothing), he follows the leadership of the Democratic majority leaders in Congress rather than assuming leadership himself.What they want is minimal congressional oversight, a number of additional regulations and a limit on CEO salaries of those receiving funding from the government, possibly a first step by the Democratic Party in adding a Maximum Wage Law to the Minimum Wage Law already on the books.

Senator McCain joins Senator Obama in proposing new regulations, although he is vaguer about what the regulations should be, and in calling for congressional oversight. But his major efforts with regard to the crisis still seem to be focused on putting some people in prison and firing some others.

Senators Obama and McCain are right that there are certainly criminal acts to be uncovered in the financial services industry. But to return to 1929, Galbraith points out with regard to the crimes of the bankers and the businessmen of that time, that there is always embezzlement and fraud going on in the market place. But there is always more crime in good times than in bad, and that the embezzlement and fraud of the 1920s did not cause the crash, but were exposed by it. We have all noticed this with the cases of World.Com and Enron. There was criminal activity in the two corporations, and when the stock dropped and the embezzlement and fraud could not be easily covered up, some people went to prison. But their actions, however reprehensible, did not cause the stock to go down. The fall of the stock revealed the crimes.

As for more regulations, we need to face the fact that regulations to prevent the crisis (and, for that matter, the great crash of 1929) are already in existence. That they were not properly used might justify some firings, but the firing of a few individuals would not guarantee that their replacements would do a better job. The Federal Reserve system has been around since 1913([link edited for length]), the F.D.I.C. since 1933([link edited for length]). They are supposed to prevent crises, not demand more powers to deal with one. In the 1988 edition of his book, Galbraith still believed that the regulatory system might still be sufficient to prevent another Great Depression “Yet all this reinforcement notwithstanding, it would be unwise to expose the economy to the shock of another major speculative collapse. Some of the new reinforcements might buckle.” (4) Well, budkle they did. And now it is proposed to prop them up to pretend, again, that all is well. The proposals of McCain and Obama about Congressional oversight sound hollow in light of the fact and Senator Dodd, the Chairman of the Senate Banking Committee admited that he was taken completely by surprise by the bailout of AIG, and then announced, Joined by Senator Judd Gregg, the ranking Republican on the Senate Budget Committee, that all the shoes had dropped, and there would be no more bailouts([link edited for length].

If there is to be Congressional oversight, it should not be tacked on to a massive bailout. It should begin with a thorough investigation of why all the regulations and all the regulators put in place to prevent this kind of collapse not only allowed but encouraged the behavior which it was meant to guard against. Congress should not be signing off on a bailout of the negligent regulators, it should be considering scrapping the system and taking a more active role in issuing currency and regulating its value, as is its constitutional duty.

In June, I wrote an article saying that the United States in drifting toward dictatorship largely because of the irresponsibility of the Congress([link edited for length]). This article can be regarded as part two of the same discourse.

NOTES:

1. Chrichton, Michael, STATE OF FEAR, Harper Collins, 2005, ISBM 061015733 97806015731.

2. Galbraith, John Kenneth, THE GREAT CRASH 1929, Houghton Mifflin, 1988, ISBN 0-395-47805-7, pp.4-11.

3. ibid., pp32-4

4. ibid. p.193

N.B. In talking of the Presidential candidates, I mentioned only Senators Clinton and Obama. Several of the other candidates have taken a stand against the bailout, but none of them are, or have party members who are, members of Congress, and so are not in a position to block the Bush program.