"Bold action" was the cry from many as the credit crisis continued to batter Wall Street, and bold action is what the Street got Friday.
George W. Bush announced that the government would inhale bad mortgage loans from ailing banks, would insure money market funds that looked like they might break the buck, and would temporarily ban short selling in more than 700 stocks. And this comes after nationalizing Fannie and Freddie and bracing the world's largest insurer.
"The American economy is facing unprecedented challenges. We are responding with unprecedented action," Bush — flanked by the heads of the Fed and of the SEC, as well as by the Treasury secretary — told reporters.
Are his actions unprecedented? Outside of wartime actions (like the Emancipation Proclamation, which was an economic weapon more so than a civil rights issue), pretty much.
There have been bold economic actions (and inactions) before, of course — Andrew Jackson's destruction of the Second Bank of the United States, the decision to twice let J.P. Morgan bail out the economy in saving the gold standard and later in the despair of the Panic of 1907, Truman's attempt to nationalize the steel industry (pitched as a wartime measure), Nixon's price controls.
But when bold action on the economy is considered, all eyes must alight on FDR. His New Deal package and concurrent legislation dramatically changed the nation's financial landscape at a time when many people considered a benevolent dictatorship to right the economy as a legitimate option. Ignoring the broader policy changes he inaugurated, let's look at the bank holiday he declared upon taking office.
In a fascinating off-the-record confab with reporters he held the next day, he explained that he was taking extraordinary actions under ambiguous guidelines:
"The general thought at the present time is that it is absolutely impossible by tomorrow to draft any complete or permanent legislation either on banking, or on budget balancing, or on anything else, because the situation, as you all know, is changing very much from day to day, so much so that if I were to ask for any specific and detailed legislation it might be that the details will have to be changed by a week from today. Therefore it is necessary - I think you can make a pretty good guess - that I shall have to ask for fairly broad powers in regard to banking - such powers as would make it possible to meet the changing situation from day to day in different parts of the country. We cannot write a permanent banking act for the nation in three days. That is about the size of it."
The "soundness" of the nation's depository banks was much discussed, too.
"I don't want to define ‘sound' now. In other words, in its essence-this is entirely off the record-in its essence we must not put the government any further in debt because of failed banks. Now, the real mark of delineation between sound and unsound is when the government starts to pay its bills by starting printing presses. That is about the size of it."
And then he noted that the government was going to get in the insurance business (sound doubly familiar?) by ensuring bank deposits, the genesis of the FDIC.
"The objective in the plan that we are working on can be best stated this way: There are undoubtedly some banks that are not going to pay one hundred cents on the dollar. We all know it is better to have that loss taken than to jeopardize the credit of the United States government or to put the United States government further in debt. Therefore, the one objective is going to be to keep the loss in the individual banks down to a minimum, endeavoring to get 100 percent on them. We do not wish to make the United States government liable for the mistakes and errors of individual banks, and put a premium on unsound banking in the future."
He continued his dynamite by foreshadowing his intent to ban individuals from holding gold, which was to be collected and concentrated in the Federal Reserve.
All very bold, and arguably bolder than the current actions. But, unlike the current team, FDR had much of his agenda figured out in the waning days of the Hoover administration, and intentionally played dice with the economy (as in waiting on the bank holiday until he was in office, instead of urging a flailing Hoover to take action).
It appears the Bush team is doing this on the fly (although, after Iraq, we hate to assume). Such quick and far-reaching actions in that light really are unprecedented.