The Harm FDR Did
FDR is hailed as the savior of Depression America. But there is another, less charitable view.
As Americans conjure images of '30s-era soup lines and fedora hats, policymakers are recalling President Franklin Delano Roosevelt, the man often credited with ending the Great Depression. But is his interventionist approach really what today's economy needs?
The Daily Beast caught up with Amity Shlaes, author of The Forgotten Man: A New History of The Great Depression, a best-selling book criticizing Roosevelt's New Deal. Shlaes has argued that Roosevelt made serious missteps in what he described as his "bold, persistent experimentation" with the economy—missteps that today's politicians seem poised to repeat.
"You've already seen politicians invoking the New Deal, and there's some New Deal-ish chatter coming in Obama's recent remarks," Shlaes said. "The troubling aspect of the current situation is that the Bush administration and Henry Paulson, the Treasury secretary, are seeking a lot of latitude. Probably too much latitude."
“Now the ‘forgotten man’ is borrower, the person who's paying the mortgage, who’s currently kept up with the mortgage, and now will have taxes, direct and indirect,” as a result of radical new policies, said Shlaes.
The popular history of the Great Depression goes something like this: The banking industry collapsed as President Herbert Hoover stood idly by, trusting market forces to turn things around. He was succeeded by Roosevelt, a self-described champion of what he called the "forgotten man at the bottom of the economic pyramid." Roosevelt instituted the New Deal, a radical program of fiscal intervention fueled by government spending, that salvaged the economy until World War II finally ended the Depression.
But in her book, Shlaes contends that many New Deal reforms made America's stagnation worse. The government's intervention in the 1930s was so broad, and often so arbitrary, that those facing bankruptcy and a collapsing share price did not know exactly how the administration would behave. A similar confusion about exactly what Paulson intends—which firms to save and which to go to the wall—is dogging the current “rescue.”
Today's participants in the economic debate swirling around the country are making the same mistakes as Roosevelt, said Shlaes, who serves as a senior fellow at the Council on Foreign Relations and also pens a column for Bloomberg News. Limited intervention can be good, but not if it is undermined by a cacophony of vague government programs and near-arbitrary bailouts of individual companies.
"Rather than introduce a rules based system, we're introducing a personality based system," Shlaes said, referring to what she called an inappropriate focus on the political players at the center of the mortgage crisis. "Markets don't like that. They want to know what the rules are."
The Bush administration has been criticized for its inconsistent approach to bailing out financial institutions. It rescued American International Group, a huge insurance company, just a week after it allowed Lehman Brothers to collapse. It rescued the mortgage giants Fannie Mae and Freddie Mac, which got in trouble partly because political support for extending home ownership had earned them unstated promises that they would receive a government bailout if needed.
The Roosevelt administration made similarly arbitrary decisions, Shlaes said, and that hurt markets in the long term. She recommends laying out exactly what the markets should expect from the government.
"Before we give blanket deposit insurance to the world, we should say what banks are supposed to do," she explained. "If we believe that houses are an entitlement owed by the government, we should say that."
Roosevelt’s “forgotten man” was someone the market and the government passed by when bad times hit. But according to Shlaes, the "forgotten man" of the 1930s was the man who waited for a recovery that wouldn't come, or the man who ultimately paid the price for the government's misadventures in economic engineering. The "forgotten man" of today fits something closer to the latter description, Shlaes said.
"Now the 'forgotten man' is borrower, the person who's paying the mortgage, who's currently kept up with the mortgage, and now will have taxes, direct and indirect," as a result of radical new policies, she said. "That's a really bad thing to impose on someone who may be about to lose his job, especially when it's not his fault."