"Save Us From the Moneymen"
 
Will Reishman, May 19, 2005:

As the leader whose presumed neglect or incompetence allowed the American boom of the 1920’s to plunge into the depths of depression, Herbert Hoover is not known for his economic insight. But based on a few thoughtful passages from his memoirs that may be an unfair assumption.

One of this student’s most helpful teachers of things financial has been Doug Noland, economic analyst and author of the weekly commentary, “The Credit Bubble Bulletin.” In Mr. Noland’s recent posting, he shares a few excerpts from The Memoirs of Herbert Hoover – 1929 to 1941 that provide insight into systemic Credit Bubble dynamics.

Quoting Hoover: “One trouble with every inflationary creation of credit is that it acts like a delayed time bomb. There is an interval of indefinite…length between the injection of the stimulant and the resulting speculation. Likewise, there is an interval of a similarly indefinite length…between the injection of the remedial serum and the lowering of the speculative fever. Once the fever gets under way it generates its own toxics.”

While it's certain that the credit bubble engendered under Fed Chairman Alan Greenspan will end very badly, it's impossible to predict when or in what fashion. We can see mounting signs of stress in this or that subset of the economy, but the survival reflexes of the monetary inflation monster are not to be underestimated. Also, as Mr. Hoover clearly understood, the fever of recklessness and speculation can morph in unexpected ways, very like a cancer that metastasizes and spreads from one organ or gland to others.

Again, Mr. Hoover: [Our financial system weakness was not solely in the banks.] "...Throughout the whole business of providing capital for our economic life there ran a pollution – the habit of making money by manipulation and promotion of securities…[T]he financial world, instead of providing merely the lubricants of commerce and industry, had often set itself up to milk the system. Worse still, instead of being financial advisers to commerce and industry, the financiers had, in many ways, set themselves up to dictate the management of it.”

That's an incredibly apt description of today’s once great American capitalism. Instead of financing factories full of technically superior production equipment, rather than raising and deploying capital to develop real energy alternatives without constant pining for government subsidies, Wall Street today has become largely a money game, precisely as Mr. Hoover describes the '20's: “making money by manipulation and promotion of securities.” Modern moneymen milk the system that gave each of them a blessed opportunity, grasping for every ounce of personal wealth while they can.

Mr. Hoover again: “The credit system in all its phases should be merely a lubricant to the systems of production and distribution. It is not its function to control these systems…this is intolerable if we are to maintain our civilization.”

In short, the cancer of financial engineering profoundly threatens America's prosperity. Our economy is dominated by moneymen, rather than productive inventors and entrepreneurs, and their hardworking partners on the production lines.

Yes, there have been important exceptions in electronic and biological technology within the last generation, though innovation there has faded markedly. Today technical innovations are relegated mostly to consumer and entertainment products, none of which are actually produced in our own factories.

Perhaps, the economic 'adjustment' (a polite euphemism for what's likely to come) from the excesses of debt and the perversions of economic incentive will purge the cancer of greed and reckless selfishness. We can pray that sensible Americans prepare to re-establish a sound and sustainable prosperity based on the fundamentals of free-market capitalism, rather than an oligopoly of the financial elite.

We can also ask the Good Lord to save us from the moneymen.