Opinion

The Great Debate

Transition lessons from FDR

November 14, 2008

liaquatahamedLiaquat Ahamed is the author of “Lords of Finance: The Bankers Who Broke the World”, a book about the causes of the Great Depression to be published by Penguin Press in January 2009. After working as an economist at the World Bank, he spent twenty-five years as a professional investment manager in London and New York. The opinions expressed are his own.

The papers have been full of comparisons between the elections of Barack Obama and Franklin Roosevelt. Like FDR, Obama is assuming the presidency in the middle of a financial crisis. Also like FDR, he has been carried to the White House on the back of the public’s repudiation of the policies of the previous administration and a wave of enthusiasm for his promise of change. There is even talk of a new New Deal.

With all these references to Roosevelt in the air and so much speculation about the transition, it seems natural to ask if there are any lessons to be drawn from how FDR handled his transition into office.

Roosevelt was elected to office in November 1932, with the country in the third year of the Depression and unemployment rates at 25 percent. In the four months between his election on November 8 and the inauguration on March 5, 1933, the economy took yet another lurch downwards and a wave of bank runs swept through the country.

Herbert Hoover, the outgoing president, tried to elicit support from Roosevelt for bipartisan action during the transition. Believing that the bank panic was caused by fears over the incoming Democrats’ future economic policies, he tried to pressure Roosevelt to back away from some his campaign promises. Roosevelt simply ignored him and refused to engage in any policy discussions until he himself took office.US-PRESIDENTS

Roosevelt maintained his hard line against cooperating with the out-going administration to the very end, even on issues over which he and Hoover might have agreed. For example, on the day before the inauguration, as the run on banking system threatened the New York Fed, Fed officials tried to get Hoover to announce a national bank holiday. Hoover, who was in his very last day in office, thought this made no sense unless Roosevelt also signed up. But in a stormy meeting at the White House, Roosevelt refused to endorse any moves, declaring that he would do nothing until after he was inaugurated the next day.

Two days later, Roosevelt went ahead and closed every bank in the country. Hoover would forever blame Roosevelt for playing politics with the economy.

Although Roosevelt was undoubtedly somewhat motivated by political considerations, this was not the whole story.  With the mandate that he had received, Roosevelt saw little reason to have to compromise. He was willing to take the risk of prolonging the economic turmoil for a few more months for the sake of getting his own economic program in place.

This current presidential transition is just as tricky. A bank bailout package of $700 billion dollars is half done, working its way through the system, although it keeps changing shape every few days. A fiscal stimulus package of unknown magnitude by a lame duck session of Congress is being mooted. With all these balls in the air, can Obama afford to emulate Roosevelt and sit the game out?

While the Bush administration has made many of the same mistakes that Hoover’s did—constantly underestimating the scale of the problem, relying excessively on private sector solutions, doing too little too late—in the last few months it has changed its approach.

While there may be a bipartisan consensus on the broad steps that need to be taken to rehabilitate the U.S. financial system, there remain some big differences on a range of issues. How much of the bail out money should be directed to homeowners in trouble rather than channeled into banks?  What conditions should be demanded of the banks that receive money? Who else apart from banks should be getting bailed out?

If they threw themselves into the ring at this stage, the Obama team would be forced to spend some of its political capital on needless wrangling with a lame duck administration.

There are also some political advantages for the Obama team to let the current administration do some of the experimenting. In designing the financial rescue plan, everyone has been operating somewhat in the dark. Why not let the outgoing administration take the political heat for some of the false starts and blind alleys that will be an inevitable part of the process?

There is little risk that the Obama team will be limiting their future options significantly by this tactic.  The broader danger of a hands-off strategy during the transition is that it leaves the management of the economy in limbo until January 20.

Two months can be a long time when a financial crisis is raging. But it’s far better to do it right than get it done right now.

(Pictured above: Portrait photo of Franklin D. Roosevelt. REUTERS/White House)

Comments
4 comments so far | RSS Comments RSS

Nr. Liaquat Ahamed, author of “Transition Lessons fron FDR” is correct in his recommendation that the President-Elect Barack Obama’s transition team wait until the Bush Administration leaves office. Mr. Ahamed’s reasoning is valid. Since the transition team has seasoned and experienced professionals, I am confident that the transition will be smooth and avoid the pitfalls documented by Mr. Ahamed.

Posted by Dean M. Habeeb Ghatala | Report as abusive
 

I am very disappointed by hearing all these non-sense. 1939-48, the world was in a big war. America was flooded with immigrants from Europe. Now, America has 95% of her own citizens. To generate economy is more challenging than 1944. 1944, Britain was Bankrupt and borrowed Money from America, over the year UK abandoned all the colonies and brought huge asset in the UK. I really don’t see the connection between now and than.

 

Today US Fedeeral debt is about $11 trillion. Thanks to supply side economics gone wild, lack of responsibility in governing and an artificial economy based on debt: and restructure of interest rates downward at a time they did not require such a move. Who is to blame: all of us, but we do put our trust in the US and its Congress to govern in areas we do not have opportunity.

The citizen is also at blame as we have forgotten the past and have decided that for some reason, education and understanding history is less important. Am I being too harsh? Maybe.

In 1930 the US had little debt except for the past World War One costs. We could afford to spend our way out of the depression and it took time. Today that is another issue. This problem is truly world wide and poses other threats: loss fo programs and higher inflation that could curl the longer term aspects of recovery that is banking on inflationary growth to pay off lower interest rate debt obligations that will be produced in the trillions.

This is not a normal downturn: this is a normal change in periodicity to deflationary decline. It is part of a longer term cycle and could have been predicted.

Roosevelt built the economy bottom up. There is little of that occuring as it needs to be today. The great
risk is downward spiral due to burden of debt and higher unemployment.

But the untold risk is global and global tension.

Posted by PS | Report as abusive
 

Roosevelt took an economy in a recession and turned it into the worst economic down turn this country has seen. How; increased taxes, constantly changing rules making it impossible for business to plan, central planning of the economy in Washington (a farmer could not choose what crop to plant without permission from Washington), and wage and price supports. The economy did not really recover till Truman started tearing the regulatory mess apart. Heaven help us if Obama uses Roosevelt as a model

Posted by stan | Report as abusive
 

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