Obama's Panic Problem

PANICS THROUGH HISTORY

The first major American financial panic occurred in 1819, before the rise of modern political parties, occasioned partly by mismanagement of the enormously powerful, privately run Second Bank of the United States. Although power did not change hands—the incumbent president, James Monroe, ran virtually unopposed in 1820 - public outrage helped prepare the way for the rise of Andrew Jackson later in the decade, and Jackson duly destroyed the bank in the 1830s. (Author's note: A previous version of this article read "James Madison" where it now, correctly, reads "James Monroe." We historians take posterity very, very seriously.)

Thereafter in the nineteenth century, panics, in which plentiful money and overextended credit led to sudden contraction and ruin, hit the American economy roughly every twenty years, in 1837, 1857, 1873, and 1893. The political costs for the parties in power were considerable and often disastrous. In three out of the four cases, the incumbent party - which in all three, as it happened, was the Democrats—lost the presidency at the next national election. Only after the panic of 1873 did the Republicans hang on. But in the 1876 election, the sitting president, the Republican Ulysses S. Grant, did not run, and the G.O.P. candidate, Rutherford B. Hayes, who decisively lost the popular vote, prevailed only because of disputed state results, suspected fraud, bribery, and high-level back-room deal-making.

In 1907, the failed efforts of some New York City tycoons to corner the copper market sparked a panic brought both the nation's banks and the stock market to the brink of total devastation, staved off only by the intervention of the preeminent financier, J.P. Morgan, with the agreement of the erstwhile trust-buster, President Theodore Roosevelt. Blaming the distress on certain malefactors of great wealth who wanted to undermine his policies, T.R. described the panic as a contest to determine who shall rule in this free country—the people through their governmental agents, or a few ruthless and domineering men whose wealth makes them peculiarly formidable. The following year, Roosevelt's handpicked successor, William Howard Taft, duly won the presidency. But two decades later, Herbert Hoover's inability to cope with the more grievous panic that followed the stock crash of 1929 led to a soaring victory for T.R.'s Democratic cousin, Franklin, and the beginnings of the New Deal.

The removal of certain New Deal-era regulatory protections and the growth of newly unregulated sectors of finance, vastly compounded by the incompetence of the George W. Bush administration, has brought about the current panic, the worst in over two generations—just in time for the elections. The historical record suggests it should cinch the contest for the Democrats. And the flailing performance of the Republican nominee, Senator John McCain, reinforces the impression that the old Reaganite shibboleths about tax cuts and government spending no longer serve as a propaganda cure-all for the G.O.P.

Yet Obama must also rise to the occasion and complete political tasks of his own. Since his campaign ended its rock star phase after the excess of his Berlin mass rally, he has run basically as the anti-Republican, the antidote to supply-side dogma, the cure for the failed Reaganite anti-government theories of the past (though he carefully avoids mentioning Reagan, whom he praised in the primaries as a way of disparaging Bill Clinton). That Senator McCain and his running mate, Governor Sarah Palin, have returned to those bromides as if it were 1984 enhances the Democrats' historic opportunities this year all the more. But to close the deal, Obama will need to get beyond telling curious voters to go look at his website or to offer a laundry list of new government programs he will support. He will need to support and promote, as the Roosevelts did, a plan of action, which might well include federal investigations of possible criminal wrongdoing.

Then, should he win, Obama will need to be decisive and steadfast. As history also suggests, hard times may help guarantee a presidential electoral victory, but they do not guarantee a successful presidency or even re-election. Any doubters should remember the Whigs who won in 1840 - only to fall into political confusion at the death of their new president, William Henry Harrison, and lose the White House four years later. And in recent times, Democrats might recall Jimmy Carter, whose failed presidency ended before today's voters under 30 years old were either not born or still infants. Carter faced no financial panic, but he did inherit an economy hamstrung by stagflation, which he mishandled—and wound up getting defeated by it at the hands of Ronald Reagan.

Economic panics may be prologue in politics, but the conclusion is not completely determined even by elections. It depends on the actions of presidents.

Please also read: What Obama and McCain Can Learn From FDR by Harold Evans