Left Flank

I'm not surprised The Weekly Standard's John McCormack links to an article trashing FDR by asserting «The seeds of that global conflict [WW2], unimaginable in 1933 given the relative weakness of Germany and Japan, were planted in the first years of the Roosevelt administration as FDR focused on the American economy.» I'm surprised Frederick W. Kagan wrote it.

As the scale of the economic crisis becomes clear and comparisons to the Great Depression of the 1930s are tossed around, there is a very real danger that America could succumb to the feeling that we no longer have the luxury of worrying about distant lands, now that we are confronted with a «real» problem that actually affects the lives of all Americans. As we consider whether various bailout plans help Main Street as well as Wall Street, the subtext is that both are much more important to Americans than Haifa Street.

One problem with this emotion is that it ignores the sequel to the Great Depression -- the rise of militaristic Japan marked by the 1931 invasion of Manchuria, and Hitler's rise to power in Germany in 1933, both of which resulted in part from economic dislocations spreading outward from the U.S. The inward-focus of the U.S. and the leading Western powers (Great Britain and France) throughout the 1930s allowed these problems to metastasize, ultimately leading to World War II.

Is it possible that American inattention to the world in the coming years could lead to a similarly devastating result? You betcha.

I actually agree with this opening, and I expected Kagan to argue that economic issues are security issues. Instead, Kagan turns hack and attacks FDR. This is an astounding reversal of post-WW1 history, when Republicans, led by Henry Cabot Lodge, blocked ratification of the Treaty of Versailles, because of Article One enabling the League of Nations. The US officially ended its participation in WW1 with the Porter-Knox Resolution on July 2, 1921. Republican presidents, Warren G. Harding and Calvin Coolidge, were bystanders as private agents conducted American foreign policy and Congress increased tariffs. Coolidge's term witnessed the Kellogg-Briand Pact of 1928 outlawing war. Herbert Hoover's most significant foreign policy successes involved improving relations with Central and South American nations by replacing the Roosevelt Corollary with the Clark Memorandum. The most significant Republican foreign policy goals in the 1920s involved German reparations. FDR, in 1932, confronted Republican isolationists in Congress.

Partisan animus must cloud Kagan's perspective on the Roosevelt administration. Kagan ironically doesn't appreciate «...the patience with which FDR brought the country to understand the danger of fascism.» FDR, one of the very few presidents fluent in foreign languages, including German, recognized the danger of Hitler's 1933 election immediately, yet it took him until 1941 to navigate the shoals of depression and Republican isolationism to position the US as the arsenal of democracy. In the process, FDR battled Democratic segregationists who, though, supportive of military force, also confronted FDR's economic and social policies. Kagan wants to divide presidential responsibilities for economic, social, and foreign policies, as if any president could get congressional approval for one without considering logrolling attempts to combine the three made by election-minded politicians.

Kagan deserves a spot on Fox with Michael Goldfarb, not a foreign policy fellowship.

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Here's another Great Depression parallel: «China is the America of this century.»

The initial stages of the credit crunch in 2007 were managed so apparently painlessly because sovereign wealth funds from the Middle East, but above all from China, were willing to step in and recapitalize the debt of American and European institutions. The pivotal moment in today's events came when the Chinese SWF China Investment Co. was unwilling to go further in its exploration of buying Lehman Brothers. CIC's turning back will be held up in the future as a moment when history could have turned in a different direction.

Now there will be plenty of reasons why the Chinese pulled back. The logic sounds like the American case of 1931. Some of the arguments that are reverberating around Beijing are very reasonable: there is a great deal of uncertainty, and the SWFs might lose a lot of money. CIC would have initially lost some money with Lehman. Some lines of thought are more emotional: might not 2008 be a payback for the American bungling of the 1997-1998 East Asia crisis?

We are about to see what stake China really has in the survival of the globalized world economy. As in 1931, the political arguments are all against such an operation. Only the far-sighted will see that the economic case for a rescue is compelling.

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Roger Lowenstein explains why Ben Bernanke and Henry Paulson are saving America from The Wrong Emergency

In 1932, at the height of the Great Depression, the government created the Reconstruction Finance Corp. to make loans to banks, railroads and others. President Hoover asked for $2 billion--equivalent in today's money to $30 billion--and spent just under that amount in the RFC's first year. The country then was in the midst of an economic catastrophe. Economic output had dropped 45 percent. Production of steel and autos were each down by three-quarters. Unemployment was 24 percent, and so on.

The allocation sought by Paulson is 23 times bigger. And it is in addition to the tens of billions pledged to back loans to Bear Stearns, Fannie, Freddie and A.I.G.

America's economy does not face an emergency--only its financial system does. This is a distinction lost on the bankers in Washington, but it is one worth remembering. On Main Street, unemployment is 6.1 percent. Home prices are down close to 20 percent and presumably headed lower. These numbers are not pretty, but they do not add up to an economic Pearl Harbor or even close.

Of course, potentially several million Americans face home foreclosure. That is a crisis, but it is a slow-developing one, for which the normal legislative process--as distinct from a shotgun corralling of Congress--will suffice. And the Paulson plan does not help homeowners.

The only emergency is on Wall Street, and that is entirely of Wall Street's making. It was the banks that made the loans, the banks that bought the paper, the banks that dumbly believed the models that said that housing prices wouldn't collapse. The pinstriped bankers who leveraged their institutions' capital thirty-to-one so as to inflate their profits (and their personal take) now complain they were done in by those nasty short-sellers. How touching to see executives from the likes of Lehman Brothers, not normally an institution associated with widows and orphans, squawk about cutthroat tactics. Regardless, had they not borrowed so much, they would not have been vulnerable.

Ultimately, the issue of blame is less important than is the question of whether markets will eventually right without a federalization of losses.

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Donald L. Luskin says it's so, and Don Boudreaux agrees.

This would suggest that anyone who says we're in a recession, or heading into one -- especially the worst one since the Great Depression -- is making up his own private definition of «recession.» And probably for his own political purposes.

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