Showing posts with label Federal Reserve. Show all posts
Showing posts with label Federal Reserve. Show all posts

Friday, June 5, 2020

JOB NUMBERS | May Unemployment 13.3% (16.3%?)

June 5, 2020—Total nonfarm payroll employment rose 2.5 million in May, and the unemployment rate declined to 13.3 percent, the U.S. Bureau of Labor Statistics reported this morning.

However, the BLS includes a note by BLS Commissioner Beach noting that some misclassification occurred, making the unemployment number as reported 3 percentage points lower than it would otherwise have been:
If the workers who were recorded as employed but absent from work due to "other reasons" (over and above the number absent for other reasons in a typical May) had been classified as unemployed on temporary layoff, the overall unemployment rate would have been about 3 percentage points higher than reported (on a not seasonally adjusted basis). Additional information is available online at www.bls.gov/cps/employment-situation-covid19-faq-may-2020.pdf.
(June 6 —See WaPo story, 11 am.)

The principal unemployment rate (U-3) is lower than many economists expected. The BLS warned in a May correction that because its survey is a sample of households during a specific period, unemployment claims data will not necessarily match up to the unemployment numbers. However, the BLS also reports different unemployment rates using a range of definitions.  U-6 is the broadest definition, taking into account those marginally attached to the labor force, including total employed part time for economic reasons. This rate was 20.7 percent, more in line with economists' expectations.

Forecasts had been for as high as 25 percent. The unemployment rate was 25 percent (or a smidgeon above) at its peak in the Great Depression. This rate occurred in the early months of 1933. Most economic observers dismiss the idea that we are in a Depression, because they expect the economy to recover quickly as soon as coronavirus cases level off or a vaccine is developed that would allow the public to resume a normal life.

But the following are examples of people who have gone on record as fearing that the May 2020 unemployment number announced this morning could be as high as 25 percent:
One of the backdrops to this was a 48 percent increase in bankruptcies in May.

Consensus: 20 percent. Most commentators, if they gave a projected unemployment number, were close to CNN's Anneken Tappe, who thought the rate will be most likely about 20 percent. Which is bad enough, and off the April chart.

To understand what is happening, behind the unemployment number itself, look at U-6 as well as U-3. U-6 is 20.7 percent. It includes people who are not in the unemployment numbers because they are marginally attached to the labor force or are employed part time for economic reasons.

Measure
Apr.  
2019 
Feb.
2020
Mar.
2020
Apr.
2020
May 2020
U-3 Total unemployed, as a percent of the civilian labor force (official unemployment rate)3.63.54.414.7
13.3
U-6 Total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force7.37.08.722.8
20.7

The number that is ordinarily reported is U-3. In 1933, that was the only number available. But U-6 provides details (insofar as any sample of 50,000 households in the U.S. economy can provide details) of people who are neither employed nor unemployed, an interesting group of potential workers.

The level of U-6 unemployment is important to look at because of the number of Americans who are on the Payroll Protection Plan and other special programs that are keeping workers off the unemployment rolls.

(Hat tip to Dr. Jurgen Brauer, Geoffrey Hilton and Dr. Farid Heydarpour for their assistance with this post!)

Wednesday, September 20, 2017

THE FED | Who Will Follow Yellen?

Janet Yellen, Fed Chair
The following is Update 206 (September 20, 2017) from Dana Chasin, reposted by permission:

Today's Fed Statement

Yellen today confirmed that the federal funds rate target range from 1-1.25 percent will remain unchanged once again, and that further reduction of the balance sheet will occur in October.

Under its asset sales plan, the Fed will be receiving monthly payments of up to $30 billion for its maturing Treasury securities, and $20 billion per month for its mortgage-backed securities, 12 months into the plan. A full transcript of Yellen's statement is here.

Yellen called this process of normalization necessary for the Fed, and timely. Inflation has been well below two percent this year. It is 1.6 percent now and is expected to rise to 1.9 percent next year. This increase should be accompanied by higher interest rates and a more stable economy.  It does not impel the Fed to accelerate its planned series of rate hikes.  

Labor Market

Labor market statistics of late offer reasons for optimism. Unemployment remains historically low and household incomes are rising. Additionally, labor force participation (employed/population) has clearly stabilized. Over the last three years, the range has been within 62.4 and 63.0 percent. The Obama years saw the labor market size stabilize, despite large and increasing numbers of Baby Boomers retiring. However, wages are barely moving.  

Yellen admitted that analysts were unsure how to explain the sluggish core inflation rate, but pointed out that temporary inflation dampeners might be source of some of the lag. She defended the Fed’s rate-hike plan, arguing that, with little remaining slack in the labor market and the typical wage-price inflation lag, inflation is likely to increase next year.

Macroeconomic Policy Chops:  Fed v. Congress

The GOP on the Hill has been unwilling for years to approve fiscal policy measures to combat the recession and stimulate the recovery. Recovery came to depend on the Fed to use its monetary policy authority creatively and aggressively – which it did to enormously beneficial effect. But when the economy was desperate for stimulus, the GOP leadership in Congress used debt brinksmanship to push through the rather contractionary 2011 Budget Control Act. 

As yesterday’s reports of deficit-negative budget bills in the Senate might suggest, Republicans' austerity fever may have broken now, or for now, with visions of major tax cuts in the offing. But gone is the day when the Fed will take guidance from Congress or the President or compensate for policies badly designed for current economic conditions. 

Succession Speculation

The President's views on monetary policy, the Fed, and his upcoming appointments to it will become much better known fairly soon. NEC Director Gary Cohn’s chance of being appointed Fed Chair after Yellen's term is up in four months has diminished. A new contender has emerged. Banker Kevin Warsh appears the most likely alternative to Yellen at present. Warsh was one of the youngest Federal Reserve Board Governors from 2006 to 2011. His views favoring broad  financial deregulation clash with those of the Yellen Fed majority. 

But Warsh has criticized low interest rates. The President, King of Debt, probably doesn't want it made too expensive. It is not beyond the pale that Janet Yellen may be reappointed Chair.  

The President praised Yellen earlier this year for being “a low interest rate person.” It stands to reason that President Trump would favor her slow and measured approach to raising interest rates. That's one reason it's hard to predict his stance. 

Fed Board – Trump Majority Forecast

With four central bank Governor vacancies out of seven seats to fill after Vice Chair Stanley Fischer’s announced retirement next month, Trump has the opportunity to shape monetary policy for years to come. A majority of Trump-appointed Federal Reserve Board is likely by early next year. Trump’s presumed preference is for accommodative policy. A howl from the bond vigilantes is likely if his nominees seem bent on economic growth. 

We will find out in short order. Trump’s first nominee cleared the Senate Banking Committee two weeks ago and is headed for a floor vote. We await the appointment of three more nominees, along with Trump’s determination on the Chair and Vice-Chair positions. However, curiously, Yellen did mention during the press conference that the Board could function with only three Governors – three incumbents, that is.

See also Chasin Update 205 (Business Taxes) and 204 (Income Taxes)

Monday, June 5, 2017

FDR | June 5, 1933 — FDR & Woodin Nullify Gold Contracts

Instant Relic, Gold-Backed Currency.
June 5, 2017 — On this day in 1933, the United States took the third of several steps in going off the gold standard.

Under the gold standard, contracts guaranteed payment in a certain quality of gold.  Certain greenbacks were designated as "gold certificates" that could be exchanged for gold (others were call "silver certificates," allowing an expansion of the reserves backing currency to include silver).

Going off the gold standard allowed for the expansion of the money supply, which had been previously restricted by the requirement that currency be backed by gold reserves.  Christina Romer at the NBER concluded in 1991 that the main reason that the United States eventually recovered from the Depression is that the money supply was expanded by gold inflows in the 1930s and this stimulated investment.

Origin of the Problems.  In some ways policies of both the Federal Reserve and the Treasury were at the heart of the cause of the Great Depression. For one thing, the Treasury Secretary was also the ex officio Chairman of the Federal Reserve Board in Washington. The person who best understood how the Fed's actions were affecting the financial markets was Benjamin Strong, President of the Federal Reserve Bank of New York. The Fed began raising its the target short-term interest rate, the Federal Funds rate, in the spring of 1928 because it felt the stock market had become frothy and inflation was taking its toll. It kept increasing interest rates, even though the economy turned down in August 1929. The Fed’s action helped generate the stock market crash in October 1929.

After the Crash of 1929, speculators began trading their dollars for gold, creating a serious drain on reserves in late 1931. Dollar-holders lost confidence in the dollar, which had two consequences

  • Banks ran out of gold to exchange for gold certificates and their cash reserves dwindled. Then they ran out of cash completely as depositors lined up to withdraw all their deposits.
  • The Treasury worried about their loss of gold reserves as overseas claims for gold to settle accounts.
To preserve the value of the dollar and stop the outflow of gold, the Fed raised interest rates again. But that further restricted the availability of money for businesses. More bank closures followed and the Fed still did not try to calm the markets by increasing liquidity.

Investors withdrew their deposits from banks and banks failed, creating panic. (The scene is well recreated at the small town level in It's a Wonderful Life (Frank Capra, 1946). The Fed did not respond to the panic by lending money to the banks. More people withdrew their deposits and took their cash home. The money supply fell 30 percent. When FDR was inaugurated many states had declared a bank holiday and their banks were closed until further notice.

1.  No Bank Payouts of Gold. Part of the problem was that the United States had been on a gold standard since 1879, except for an embargo on gold exports during World War I. When FDR was inaugurated on March 4, 1933, he and his Treasury Secretary, Will Woodin declared a national bank holiday. Woodin personally supervised round-the-clock printing of $2 billion in greenbacks by the Bureau of Engraving and Printing, filming of the presses at work late at night and the dispatch of vans filled with currency for banks, and distribution of the film clips to cinemas around the country to be screened along with the latest movie offerings. Advisers had previously suggested issuing "government scrip" and Woodin scratched his head, noting the ban on banks' redeeming gold certificates in gold coin, and advised FDR: "What are greenbacks if not government scrip?"

From the first day of his presidency, FDR embargoed payment in gold.
At the same time as the bank panic spread within the United States, reaching its apex just as FDR was sworn in, foreign creditors were cashing in their claims on the U.S. Treasury and demanding gold, as was their right under the gold standard regime. Gold was flowing out of the United States at an alarming rate. So along with the bank holiday, FDR and Woodin prohibited banks from paying out gold or exporting it. This was a suspension of gold payments similar to what occurred in the Great War (World War I).

2.  Ban on Private Holding of Gold. On April 5, 1933, Roosevelt ordered all gold coins and gold certificates in denominations of more than $100 turned in for other money. Everyone had to turn in all gold coin, gold bullion and gold certificates they owned to the Federal Reserve by May 1 for the set price of $20.67 per ounce. By May 10, the government had taken in $300 million of gold coin and $470 million of gold certificates.

Will Woodin, a world-class coin collector, co-author of the definitive book on American pattern coins (i.e., unique American coins that were samples of a new design), obtained a valuable specific exemption from the new law for coin collectors. They were allowed to keep their collectible coins.

3. Nullification of Contracts Defined in Gold. Different from WWI, on June 5, 1933, Congress made the exit from the gold standard permanent, and in the absence of a war. It enacted a joint Senate-House resolution nullifying the right of creditors to demand payment in gold. This applied to both public and private contracts.

The impact of this was possibly clear to Wall Street experts right away, and would become clear the following year, when the government price of gold was increased to $35 per ounce. This effectively increasing the gold on the Federal Reserve’s balance sheets by 69 percent, and reduced the value of all contracts defined in gold. This increase in assets allowed the Federal Reserve to further expand the money supply, but it reduced the wealth of contract-holders by 69 percent.

The theory behind this action was not yet developed, as it would be three years before John Maynard Keynes would publish his General Theory. But FDR either learned from the Bank of England, which has already gone off the gold standard in 1931 in response to the Crash of 1929, or he understood instinctively that greenbacks had more credibility if the issuer had a lot of gold reserves, and this allowed the Treasury to print more greenbacks and the Federal Reserve to put them into circulation, expanding the most basic definition of the money supply.

Treasury Secretary Will Woodin, being a life-long Presbyterian and Republican, disagreed with FDR on this move. He felt bound to honor contractual commitments to pay back in gold. He had campaigned on the hard-money platform in 1998 when he ran for Congress in his home district around Berwick, Pennsylvania. However, his loyalty to FDR made him swallow his doubts and support FDR in his action.

But it was FDR-Keynes theory, already implemented by the Bank of England, that expanding the money supply and making credit easier would spur investment and economic growth. The Great Depression created an unemployment rate of 25 percent, and Britain's going off the gold standard two years before justified an equivalent action in the United States, an action that Herbert Hoover could not take because of his own commitment to hard money.

Aftermath. The American economy turned around as soon as FDR came into power. The Depression formally ended in the quarter he was inaugurated, although it would be years before the economy recovered to the pace it was running at in the steaming 1920s.

The U.S. Treasury held the $35 per ounce price until August 15, 1971, when President Richard Nixon announced that the United States would no longer convert dollars to gold at a fixed value, thus completely abandoning the gold standard. Since there was no longer any need to back the dollar currency with gold, President Gerald Ford in 1974 signed legislation that permitted Americans again to own gold bullion as an investment independent of jewelry, dental or industrial uses.

Related Posts: Are Fed Models Out of Sync? . Mnuchin Testimony, May 18, 2017 . Glass-Steagall . FDR's First Fireside Chat

Friday, July 22, 2016

LEHMAN | Did It Have to Fail?

Paulson, Bernanke, Geithner.
James B. Stewart in The NY Times today reports on a new study of the dark days of Lehman Brothers in September 2008.

Could Lehman have been saved from bankruptcy? Should it have been? Would the world thereby have been saved from the Great Recession and its globally destabilizing consequences?

The study's author is Laurence M. Ball, Chairman of the Economics Department at Johns Hopkins University. He presented his 214-page paper, "The Fed and Lehman Brothers", which took him four years to write, to a conference of economists in Cambridge, Mass.

The study makes, as I read the story, two main points. Despite what Treasury and Fed officials (i.e., Henry M. "Hank" Paulson Jr., Treasury Secretary; Fed Chairman Ben S. Bernanke; and NY Fed President Timothy F. Geithner) have said,
  • Lehman Brothers could have been saved. Bernanke told the Financial Crisis Inquiry Commission in 2010 that Lehman's collateral was weak and saving it would have required breaking the law. Ball argues that is not true, and that Lehman's financial condition was never properly analyzed. The whole point of the creation of the Federal Reserve in 1913 was to "lean against the wind" and when panic hits, its job is to save the system. The officials of the time underestimated the consequences of not saving the system and we live with these consequences today. 
  • Paulson called the shots. Bernanke at the Fed followed the lead of Treasury Secretary Paulson, who took charge of the situation and was the prime mover in promoting the decision to let Lehman fail, because he didn't want to be known as "Mr. Bailout". Paulson says that the decision was that of the Fed to make.
Ball's paper was supported in its general conclusions by Prof. David Romer at Berkeley and another professor at M.I.T. Other academics interviewed by The NY Times withheld their judgment.

Friday, December 4, 2015

FOMC | Job Numbers Mean EZ Decision (Comment)

The Effective Fed Funds Rate. Source: FRED, St. Louis Fed. Since Dec. 2008
 the target rate has been between 0 percent and 0.25 percent, i.e., at the
"zero bound"; rate will likely be raised at the next FOMC meeting.
The job numbers from the BLS this morning show total nonfarm payroll employment increased by 211,000 in November.

The unemployment rate was unchanged at 5.0 percent.

Job gains occurred in construction, professional and technical services, and health care. Mining and information lost jobs.

The numbers have been widely anticipated because they are the last before the Ides of December FOMC meeting.

Fed Chair Janet Yellen made clear yesterday in her testimony before the Joint Economic Committee of the Congress that the Fed is ready to raise the zero-bound Federal Funds rate that has been at the zero-bound level since December 2008. The only major concern is lackluster economies in the rest of the world.

Comment

The Fed has a dual mandate (besides the basic one of ensuring stability in financial markets) – its traditional 1913 mandate to preserve the value of the dollar by reining in lending during periods of speculation and therefore inflation, plus its 1946 mandate to ensure full employment.

Interest-rate doves like Paul Krugman and Brad DeLong argue that since the United States has no inflationary pressure, interest rates should not be raised. If inflation is below the 2 percent Fed inflation target, leave rates alone. While unemployment is low, the employment/population ratio is also low and economic growth has been slow.  Why is anyone is thinking of raising interest rates? They are afraid raising rates will kill the economy.

One answer is that the zero-bound rate is an unnatural one, giving no flexibility on the stimulus side. The Fed wants to be able to respond to economic developments in either direction. So long as it is at the zero bound, it is powerless to do much to stimulate demand, notwithstanding the QE initiatives.


Wednesday, October 28, 2015

FOMC | Committee Stands Pat

Jeffery Lacker, FRB Richmond
inflation hawk, voted again for
a rate increase, losing 9 to 1.
Today the Federal Open Market Committee voted to continue interest-rate policy at the zero-bound level, where it has been since 2008.

The sole vote against the decision was that of Jeffrey M. Lacker, President of the Federal Reserve Bank of Richmond, who would have preferred that the FOMC raise the target range for the federal funds rate by 25 basis points at this meeting. He had voted for a rate increase at the previous FOMC meeting.

The case for raising rates is that zero-bound interest policy makes it difficult for the Fed to encourage the economy should it take a turn for the worse, and unemployment rates are low by historical standards.

The majority view is that the FOMC has been charged since 1946 with steering between the twin dangers of inflation and unemployment. The inflation rate is below the Fed target of 2 percent and economic growth has been moderate by historical standards.

Meanwhile, the news from the Bureau of Labor Statistics this morning was that the September improvement in jobs was broadly based among metro areas.

The next meeting of the FOMC is in mid-December. The meeting will be informed by two more months' worth of new data on labor markets and other economic indicators.

Thursday, October 22, 2015

BANKS | Comptroller Curry Is Scary

Thomas J. Curry, Comptroller of the
Currency
Thomas J. Curry, Comptroller of the Currency, gave mild speeches on March 2 and April 2 focused on risks from terrorist attacks on cybersecurity, a threat to bank operations. Worrisome, but with an enemy on some distant shore and technical fixes waiting in the wings.

Yesterday at the Exchequer Club in Washington, it was different. He allowed himself to step out and make a few spicier comments. He acknowledges that at this stage of the credit cycle, credit quality is and can be expected to deteriorate, and "credit risks are coming to the forefront," ahead of threats from jihadist hackers.

Curry doesn't go much further than that in his remarks. But he plants the seeds of worry. Wall Street on Parade spells out what Curry might have said. Reforms have failed and we may see in this credit cycle a repeat of what led up to the disaster of 2008. One solution is more unified oversight of the financial sector at the Federal level, i.e., encompassing the securities industry.

When I was working for the Federal Reserve and FDIC in the 1960s, the Bureau of the Budget was looking at unifying financial regulation just as a matter of efficiency as well as effectiveness. But if you are an institution being regulated, the last thing you want is efficiency and effectiveness. You want the maximum number of regulators, so you can shop among them.

And if you are the regulator, you don't want your agency eliminated. We can't expect the Comptroller of the Currency, speaking for a 150-year-old office that has had to fight to remain independent from the Federal Reserve System, to advocate for consolidation of Federal oversight agencies.

The issues are surfacing now because of the good work of Pam and Russ Martens of Wall Street on Parade, who are keeping up a steady Pecora-like stream of revelations of what Senator Wright Patman used to call malfeasance, misfeasance and nonfeasance. The candidacy of Bernie Sanders has kept the Glass-Steagall issue in the public eye during the first Democratic debate.

Here is a snippet from today's post from the Martenses outlining the problem:
What Curry didn’t mention are the real elephants in the room – the casino room on Wall Street: the $180.29 trillion of derivatives held at the insured banking units of just four banks: JPMorgan Chase, Bank of America, Citibank (part of Citigroup) and Goldman Sachs. Just those four banks hold 91.1 percent of all derivatives held at the thousands of banks in the U.S. If that’s not concentrated risk, we don’t know what is. Curry also didn’t mention the frightening reality that some of the biggest banks are up to their old dirty tricks of dodging capital requirements through trades with dubious counterparties.
In June, the U.S. Treasury’s Office of Financial Research (OFR) released a report that set off alarm bells. The report, written by Jill Cetina, John McDonough, and Sriram Rajan, revealed that the big Wall Street banks are ginning up their capital measures by engaging in non-transparent “capital relief trades.”
The report indicated that JPMorgan’s London Whale trades, exposed in 2012 and the subject of multiple Congressional hearings and an in-depth report by the Senate’s Permanent Subcommittee on Investigations, was, in fact, a capital relief trade. JPMorgan Chase has owned up to losing at least $6.2 billion of bank depositors’ money on those trades.
Back in 1933, the Pecora Committee - a Senate Committee that was, unusually, named after the aggressive staff counsel, a New Yorker named Ferdinand Pecora - held hearings that led to the Glass-Steagall Act of 1933 and the Securities and Exchange Act of 1933 (while, alas, also skewering a few people who should not have been so impaled).

The Glass-Steagall Act was well-conceived and lasted 70 years. Banks traded deposit insurance for ring-fencing around the commercial banks to keep out the investment bankers. The flaw in the Act was there from the beginning, namely that the securities business was regulated separately and inadequately. The financial lobby has exploited that loophole in stages, notably in 1999 and 2002. The Economist Magazine in 1999 wisely opined that if the Congress was going to take away some Glass-Steagall controls, they would have to extend controls on the securities business; the reverse happened.

A predecessor of Curry as Comptroller of the Currency, John D. Hawke, Jr., in a speech to the NY State Bankers Association in 2000 said:
Regulatory competition has stimulated innovation and efficiency. Competition keeps all of us on our toes, and provides incentives to add real value to our supervision. While the system unquestionably provides opportunities for regulatory arbitrage, there is little evidence that it has stimulated the competition in laxity that former Federal Reserve Chairman Arthur Burns discussed 30 years ago.
Competition in laxity is exactly the term I would choose to describe what happened to the mortgage sector during the next seven years. New York State has now recognized that financial services has  become one industry, and has consolidated banking and securities oversight into one regulatory oversight body that talks openly about financial risk and the risk-taking enemies closer to home. It's time we consolidate financial regulation in Washington.

Tuesday, October 20, 2015

FOMC | Will Fed Hawks Say Boo Next Week?

The FOMC can't do much to help the U.S. economy on Oct. 27-18.
All it can do is scare people. Early Halloween at the Fed?
The long stretch of zero-bound Fed policies since September 2008 must be giving some policy makers cabin fever.

The Federal funds rate (remember that?) was dropped to near zero after the Lehman crisis.

I was there when former Federal Reserve Board Vice Chairman Laurence (Larry) Meyer of Macroeconomic Advisers told the NY Association for Business Economics in December 2008 that the FOMC should take a long vacation - two years. (Till the Fed starts to crunch, they might as well be at lunch.)

Larry Meyer didn't have any idea that the vacation would have stretched from two to seven years. It's now past the end of the Biblical-bovine feast-and-famine cycle. (Is that why the Fed term is 14 years? One full cycle? Senator Carter Glass would know.)

As a Fed hawk when he was Vice Chairman, Meyer would doubtless be on the side of those calling for a rate increase at the FOMC meeting next Tuesday-Wednesday.

The BLS state job numbers for September (as usual coming out more than two weeks after  the national numbers) that were just released this morning show little change in unemployment rates over August.

Unemployment, based on the relatively small sample of households (it's a stretch to rely on them for month-to-month guidance, but you use what there is), shows 37 states and D.C. continuing to decline month over month, with six states registering an increase and seven no change.

A state unemployment-change diffusion index - which I have advocated someone track - would reduce the multiple numbers to a single one that could be usefully charted. Compared with September 2014, the state unemployment data for September show 41 states down, seven states up, and two states unchanged. Sepember's national jobless rate, which was released earlier this month and is seasonally adjusted, was unchanged from August at 5.1 percent; it was 0.8 percentage point lower than in September 2014.

The nonfarm payroll employment numbers are more interesting and they show weakness around the country. They decreased in 27 states, increased in 20 states and D.C. and are unchanged in three  states. The biggest losers by job count - the weakest states based on a count of payroll job losses - were Missouri, Pennsylvania and Michigan. The biggest winners were Texas, New York, and Georgia.

On a percentage basis, the biggest losers were Hawaii, Vermont and Wyoming and the biggest winners were Delaware and Kansas, and South Carolina.

Compared with the same month a year ago, nonfarm employment increased in 46 states and D.C.  and decreased in 4 states. The biggest winners are Utah, South Carolina, Idaho and Washington. The biggest losers are North Dakota, West Virginia, Wyoming and Alaska.

Thursday, October 1, 2015

JUNK BONDS | How "Terrifying" Should They Be? Notes for FOMC Meeting

Bears to be released from their
cages at the end of October?
On the one hand, some calm voices are reassuring us that the recent downturn in the stock market is historically followed by a recovery. Usually.

On the other, we hear concerns that the sky above the financial markets is about to fall. Junk bonds are viewed as "terrifying" because they have grown so fast in an environment of zero-bound Federal Reserve interest-rate policies.

The fear is that the second rates do start to go up catastrophe may be waiting. Although the expected increase has been continually postponed because the time is not ripe, we have been told that it is likely to happen before the end of 2015.
A zero-interest FOMC diet for bulls
is like spinach for Popeye.

What worries me is that so many people with money are focused intently on the coming rise in interest rates. It has been such a long, long time on Easy Street, when the market bears confined by the assurance provided by a zero-interest bank environment. The possible global market reaction to higher (i.e., positive real) Fed fund rates is scary.

Better a finger tip than an arm.
The Fed, which has been largely sidelined since 2008 by its need to provide liquidity to the panicked financial markets, will feel powerful again when it starts its next upward climb in interest rates.

I hope that, if the upward march of interest rates starts at the next FOMC meeting on October 27-28, the Fed begins with the smallest possible increase. Better a finger tip bitten off than a whole arm.

Thursday, September 10, 2015

WOODIN | FDR's Last Letters to His Friend Will, 1934

This post has been moved to a private blog. To gain access, contact jtmarlin@post.harvard.edu.


Monday, August 24, 2015

FOMC - They Once Said: "When the Fed Starts to Crunch..."

...it's time to go to lunch."

I.e., when the Fed starts to raise interest rates, time to get out of the market.

But now, this maxim is being turned on its head.

People are going to lunch worldwide, ahead of a move by the Fed to raise rates.

So now we may hear something like this:

"Now that people are going to lunch,
It's a terrible time for the Fed to crunch."


Sunday, August 2, 2015

GREECE | The Euro 2015 v. Gold 1933 (Updated Aug. 4, 2015)

At one time, some greenbacks were "gold certificates" that could be
exchanged for gold coins.
(The following adds to a chapter of a biography of Will Woodin, FDR's first Treasury Secretary.)

Greece is still in the Eurozone. However, this outcome may be a case of just kicking the can down the road. Another crisis may await.

That thought is prompted by comparisons with 1933.

Similarities with 1933

Greece today has a similarly high unemployment rate to the one that FDR inherited in 1933 - one out of four people in the labor force being unemployed.

As in 1933, in the absence of action, those able to do so take their money out of the country. That happened in the waning days of the Hoover Administration. Until FDR was inaugurated on March 5, 1933, gold flowed out of Hoover's USA in the same way that euros have been flowing out of Greece.

According to Acting Comptroller of the Currency Francis Gloyd Awalt, p. 359, on the Friday before FDR's inauguration, March 3, 1933, the Federal Reserve Bank of New York saw $200 million of gold and $150 million in dollar currency transferred out of its vaults.  It was $250 million short in reserves and meanwhile the Chicago Fed alone needed $100 million in gold.

Another similarity is that in March 1933 when FDR came in, he declared a bank "holiday" for all banks, national and state. The Greek bank holiday used the same euphemism for a forced suspension of business, in response to depositor panic and the government's need for time to consider its options.

Differences from 1933

The differences between FDR's actions and those of Greece are multiple. In 1933 several essential and coordinated actions were taken to direct the United States toward stability and recovery, starting with devaluation. The Eurozone prevents Greece from taking such actions. FDR's devaluation had a triple benefit - a huge write-down of debt, a subsidy of exports and a tax on imports. The worst day of the Depression was just before FDR took office.

FDR quickly severed the formal connection with gold for American holders of currency. The Emergency Banking Act was brought before the Congress and passed before the banks were reopened. A smart lawyer at the Federal Reserve Board, Milton Elliott, had in 1918 inserted an amendment to the Trading with the Enemy Act giving power to the President to prohibit gold exporting or hoarding (Awalt, p. 365). This provision was invoked to require all private owners of gold (with exclusions for industrial use, dentistry, or numismatic uses) to sell their gold back to the U.S. Government. That meant that the United States could face foreign creditors with a gold standard that was nominally in place for international transactions.

In Greece's case, the banks reopened with another loan from the Eurozone authorities. Few fundamental changes were made within Greece that would strengthen the economy and reduce unemployment. From what I have read, the most significant change was the replacement of the defiant Greek finance minister by a less confrontational Oxford-trained economist.

What FDR Did after Closing the Banks

FDR's team, led by Treasury Secretary Will Woodin, used the bank holiday period to:
  • Ensure liquidity by printing $2 billion worth of greenbacks.  Woodin had first toyed with the idea of printing scrip to pay government bills while the banks were closed, an idea passed on by outgoing Secretary Mills, as noted by Awalt, p. 363. Then Woodin realized that scrip would just be another form of greenbacks. The currency was packed off in trucks to the cities with Federal Reserve Banks, then other cities with clearing houses, and finally other cities.
  • Review the solvency of each bank - what we call nowadays a "stress test" - to determine which banks should be allowed to reopen. This is what the Treasury did in 2008 and 2009 after the financial meltdown that put Lehman Brothers out of business. The Treasury's chief economist recollects that the principal reason Lehman was allowed to fail is that the Treasury didn't then have legal authority to lend it money against its assets.
  • Raise public confidence by announcing and publicizing government actions to ensure bank solvency and liquidity.
  • Map out a plan for addressing the consequences of the financial crisis, notably 25 percent unemployment. FDR said it would be "criminal" to adopt a plan that did nothing for the unemployed.
  • Map out a plan for financial reform to avoid a repetition of the crisis, i.e., supporting a plan for deposit insurance (which the banks wanted) and increased regulation (which the banks did not want, but which they were willing to trade for deposit insurance). Rep. Henry B. Steagall of Alabama, Chairman of the House Banking Committee, championed deposit insurance. Sen. Carter Glass of Virginia championed stiffer financial regulation (he had Steagall's position in the House when the Fed was created in 1913).
The tension in the 1929-1933 period and in 2008-2009 in the United States and now for many years in the Eurozone is about the need for national leaders to encourage consumer demand by reducing the burden of debt and creating liquidity, while ensuring confidence in the money supply - confidence that investments today will be repaid in uninflected money. In essence, the government must balance the rights of creditors with the need to encourage investment. With such high unemployment in 1933, FDR was prepared to give borrowers a break as against lenders.

Lessons from the Panic of 1893

The remarkable fact is that the U.S. dollar was pegged to gold for so long, a century between 1834 and 1934, during which an ounce of gold was kept at $20.67, with the exception of the 1860-1879 war years when greenback notes were issued without gold backing. When the price of gold rose, the U.S. Treasury would increase the supply by selling gold. When the price of gold fell, the U.S. Treasury would decrease the supply by buying gold.

The closest that the United States came to going off the gold standard may have been after the Panic of 1893, the worst crisis the United States had hitherto suffered and one that affected Will Woodin's family personally.  As in the previous panic of 1873 it resulted from excessively easy credit, resulting in speculation and overbuilding of homes and railroads. On February 20, 1893 - 13 days before the inauguration of U.S. president Grover Cleveland - the Philadelphia and Reading Railroad went broke.
  A series of bank failures followed, and then the failure of three more railroads. Since Will Woodin's family business was selling to the railroads, his father Clement was deeply troubled by the Panic and his health never fully recovered.

In the Panic of 1893, stock prices plummeted, 500 banks closed, 15,000 businesses failed. Falling prices for export crops such as wheat and cotton pushed numerous farms into foreclosure. The unemployment rate in the country rose as high as 19 percent - Pennsylvania to 25 percent, New York to 35 percent, and Michigan to 43 percent.

Jacob S. Coxey, Sr. led a highly publicized march of unemployed laborers from Ohio, Pennsylvania, and several Western states to Washington, D.C. , demanding a jobs relief program. A wave of strikes in 1894, notably the bituminous coal miners' strike of the spring and the Pullman Strike in July, led to violence in Pennsylvania, Ohio, and Illinoi and a shutdown of railroads in much of the country.

Populists and Democrats responded to poorer cotton and wheat farmers in the South and West who needed easy credit to keep their farms going. The Free Silver movement gained support from farmers who sought to liberate the economy from the straitjacket of the gold standard. President Cleveland borrowed $65 million in gold from Wall Street banker J.P. Morgan and the Rothschild banking family of England to support the gold standard.

In the ensuing 1894 elections, the Democrats were blamed for the Depression and Populists lost heavily. The election marked the largest Republican gains in history, locking the GOP thereafter into defense of the gold standard (in the previous election the party was divided).

The presidential election of 1896 was fought on economic issues and the pro-gold, high-tariff. The pro-silver candidate William Jennings Bryan said:
You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon  cross of gold.
Republicans led by William McKinley won a decisive victory. It was the last major protest of agrarian America against the cities and the industries that were growing in them. Will Woodin decided to join the hard-money Republican movement and ran for Congress in 1898. However, a Civil War veteran advocating easier money defeated him.

FDR Devalues the Dollar

FDR was determined to jettison the gold standard at home because it would get in the way of his plan for recovery. His Treasury Secretary, Woodin, when the subject of going off the gold standard at home came up, would say: "Oh no, not that again." (Woodin was decidedly in the camp of the creditors rather than debtors, but he was also loyal to both his own workers and to FDR.) FDR greatly reduced the straitjacket of the gold standard in two ways:
  • On May 1, 1933 by Executive Order, FDR required that all gold be sold to the Treasury at the existing price. The penalty was a fine of up to $10,000 or up to ten years in prison. This gave ample gold backing to the dollar for international purposes at the same time as it made clear to the U.S. public that backing of currency by gold was no longer on offer. 
  • On January 30, 1934, FDR devalued the dollar against gold, pushing the peg up to $35/ounce, where it remained into the decade of the 1960s, when I worked for the Federal Reserve Board. The panic of 2008-2009 created uncertainty that pushed up the price of gold, which peaked at $1,900 an ounce in August 2011 but fell back in July to about $1,100 an ounce despite the problems in Greece. Both numbers are well above FDR's peg - $35/ounce in 1934 would be equivalent to $623 in 2015 based on changes in the cost of living, using the BLS inflation calculator.

Saturday, July 11, 2015

CITYECONOMIST | 180K Pageviews

Thank you for reading.

Wednesday, June 24, 2015

THE FED | Moral Hazard

Paul Volcker
Wall Street on Parade in recent years has been playing the role that the Pecora Committee played in 1933.

Ferdinand Pecora was hired as general counsel to the Senate Banking Committee to investigate the causes of the 1929 Crash. His hearings in 1933 revealed many practices that tilted the financial marketplace against small investors. He laid the groundwork of public opinion to ensure passage of the Securities Acts of 1933 and 1934.

In the process, the testimony that Pecora extracted injured the reputations of many Wall Street leaders and their friends. Some practices were illegal. Others were attacked with the benefit of hindsight, in the new light of the Crash of 1929. What seemed normal in 1929 had become unethical or unfair... and with the new laws would become illegal.

Today's installment of Wall Street on Parade by Pam Martens and Russ Martens looks at the Latin American financial crisis of the early 1980s and cites from the transcript of the FOMC meeting of June 30, 1982 to examine why the Fed approved a loan to Mexico of $700 million. Mexico owed U.S. banks $21.5 billion. The Fed bailed out Mexico to bail out the banks that had loaned money to Mexico.

In an interview published in the fall of 2013, Harvard Professor Martin Feldstein asked former Fed Chairman Paul Volcker whether the high interest rates of the early 1980s caused debt problems in emerging economies. Volcker responded that U.S. bank loans were of great concern to his predecessor as Fed Chairman in the 1970s:
Arthur Burns, to his credit, was the Paul Revere on this thing. He'd go around and make speeches: "This can't continue. ... We've got to do something about it." The borrowing continued until the winter [1981-82] when a couple of banks stopped lending. Mexico ran out of money. What do you do? [my emphasis]... The big US banks and some of the big foreign banks had more exposure to Latin America than they had capital. It wasn't something you could just say: "Okay, knock off the loans by 50 percent or something and everybody will be happy." They all would have been bust. You look for other approaches, and it took nearly a decade until Mr. Brady [Nicholas Brady, Treasury Secretary, 1988-1993] came along and settled them [Brady bonds replaced Latin American debt, paying lower rates or reducing the face value, but with greater certainty of repayment].  (Martin Feldstein, "An Interview with Paul Volcker, Journal of Economic Perspectives, 27:4, Fall 2013, pp. 112-113.)
Wall Street on Parade argues that the too-big-to-fail attitude, on view in 1982, was behind the Fed and Treasury response to the financial crisis of 2007-2009.

These issues go back to the earliest years of the Fed. Founded in 1913, the Fed published a statement of its policy intentions in 1924, in its Tenth Annual Report in 1924. It announced that it would seek to encourage "productive" loans and discourage "speculative" ones. As loans to purchase securities rose the following year, the Fed tightened money. Benjamin Strong in 1927 complained about the tightening. Concerns about productive lending were shelved that year in favor of expansionary monetary policy - the Fed purchased government securities to add to liquidity.

When the Fed tightened again in 1928, it created the disastrous crisis of 1929-30, and the expansion of 1927 was viewed as the root cause. When banks started to fail, the Fed often refused to lend to them. Not until April 1932 did it expand the money supply, and this ended by August. Julio Rotemberg, "Shifts in US Federal Reserve Goals and Tactics for Monetary Policy: A Role for Penitence?", Journal of Economic Perspectives, 27:4, Fall 2013, 67-69.

Thus a "too-big-to-fail" attitude emerged from the panics caused by a tough line on the banks in 1929-32, which was motivated by a reaction to the expansion of 1927. The "too-big-to-fail" idea creates moral hazard, as Wall Street on Parade notes. As long as that is not addressed, speculative lending will grow and the global financial structure remains shaky.

Wednesday, June 10, 2015

FED | Getting Ready to Start to Crunch.

Janet Yellen, Chair of the Federal Reserve Board.
When the Fed starts to crunch, it's time to go to lunch.

The FOMC meets next week. There is talk of moving out of the zero-bound zone. Scary.

Especially when it's been nearly seven years since the 2008 meltdown and there are young people on Wall Street who have never lived through such a crisis.

As Bernard Shaw said: "We learn from history that we learn nothing from history."

Federal Reserve Bank of New York William Dudley's understated ruminations about financial market challenges ahead ahead are being echoed more loudly and nervously elsewhere by comments and stories from:
The rest of this post provides a summary of the difficult options facing the Fed and the implications for financial markets by Risk Management Advisors LLC in their June Chartbook. I am grateful to Noralyn Marshall for sending this to me and for allowing me to excerpt here from her chart book.

The zero-bound interest-rate policy that the Fed has pursued and other central banks have echoed has helped in the seven years since 2008 to restore some financial stability, at the expense of huge debt and a loss of the usual tools of monetary policy.

Risk Management Advisors sums up the perilous situation as one dominated by global central bank policy. We know that

  • Risk assessment has been distorted by a sea of liquidity and very low policy rates. The reach for yield has favored weaker credits, longer durations, and equities.
  • Debt is higher than it would have been under normal conditions, despite knowing that the great recession was the result of a debt-fueled bubble.
  • Some people have assumed debt based on excessively optimistic interest rate assumptions.
  • Credit has been granted by those with little experience in evaluating and managing credit risk (crowd funding for example).
  • Volatility-based measures of risk are understating future volatility when the Fed no longer dampens it.
  • Boosting financial assets has widened the wealth gap. 
  • The major economies all face fiscal constraints. [And so do state and local governments.]
  • Central bank purchases have temporarily removed market risk from government financing and dramatically lowered its cost.
What we don’t know is how central banks in the US, Japan, EMU, and the UK will navigate out of their iron grip on markets and bloated balance sheets.

Friday, May 22, 2015

WOODIN | 11. FDR's Election, 1932 and Cabinet Picks (Updated Oct. 8, 2015)

FDR's biggest challenge was at the Democratic Convention.
Hoover campaigned in 1928 on the theme of prosperity, but in the next four years he saw this platform  collapse under him.

In fact, the crash of 1929 created huge animus against the Hoover Administration.

For his part, FDR had two fewer obstacles to overcome to win the Democratic nomination than confronted Al Smith:

(1) The anti-Prohibition stance of Democrats in big cities was no longer such a negative. City voters were growing fast and so was the evidence of gangsterism created by Prohibition.

(2) FDR was not a Catholic.

However, FDR had two new - big -  problems in the run-up to the Democratic convention in Chicago at the end of June 1932.
  • In addition to his decade-long struggle with leg paralysis caused by his 1921 bout with polio, FDR was burdened with a huge debt from the Warm Springs, Ga., foundation that he created while there for rehabilitation.
  • Democrats in the west and south opposed the nomination of another New Yorker, after two losses by Al Smith in the general election.
Will Woodin was to play a big role in addressing the first problem and a significant role in addressing the second.

FDR's Warm Springs Problem and Woodin's Response

During 1926-28, before he was elected Governor of New York,  FDR spent half his time in Warm Springs. While regaining his health, he came to dream of sharing the restorative powers of the hot springs.

In 1926 he committed about $200,000, two-thirds of his liquid assets, to buy from George Foster Peabody the old Merriwether Hotel in Warm Springs to house a new rehabilitation center. He ended up buying nearly 3,000 acres.

After his reelection as Governor in 1930, FDR's circle of supporters turned their minds to the possibility of his running as President and the Warm Springs charity loomed as a giant albatross.

It wasn't just that FDR had ran through his bank account buying the hotel and land and then renovating the properties. The center itself was operating at a significant annual deficit because FDR arbitrarily set a weekly rate for treatment of $42, which was below his costs. On top of that he accepted patients regardless of their ability to pay. The cumulative debt in 1930 was more than the Roosevelt family could handle and precluded FDR from undertaking the expense of a campaign for the Democratic nomination and then a national campaign for the presidency. Until this matter was settled, FDR could simply not take on running for prresident.

At this juncture, Will Woodin stepped in, urged on by John J. Raskob, Chairman of the National Democratic Committee. Raskob was a businessman like Woodin. He was Vice President of both General Motors and DuPont, and champion of the idea that "Everyone Ought to Be Rich". He was prepared to put up money to support FDR's run for Governor, but not to raise money to pay off the debt.

Woodin agreed to chair the Finance Committee of the Warm Springs Board and raise money to pay off the debts. He got a commitment first from Raskob that was fulfilled. He then chipped in a substantial amount himself and went raising money by launching a public relations program pointing out the devastation caused by polio, and urging support of preventive action and rehabilitation. It worked.

Woodin's taking onto himself the burdens of the Warm Springs finances was a significant contribution  - understood by everyone who knew about the situation - to FDR's willingness to run and his electability.

FDR's Strategy for the 1932 Convention

With the Warm Springs debt addressed, FDR hastened to position himself as the champion of Main Street and the ordinary working person against Wall Street. The financial crisis caused a sea change in American electoral politics. From being viewed as the engine of the economy and the creator of wealth, Wall Street had now become a pariah. FDR was intently focused on making sure (1) the blame fell on Hoover, (2) there was a plan to fix the problem, and (3) there was a person he could put in Treasury who could take care of this while he focused on delivering the overall message.

The shift in national psychology from 1928 to 1932 was astonishing. The turnaround in the election returns has never been equalled. The Democrats went to their convention looking for a candidate who could make full use of the opportunity that economic misery offered to them.  They succeeded in finding the right person.

Treasury Secretary Andrew W. ("Andy") Mellon was too good a target not to include in the assault that the Democrats prepared on the Republicans in 1932. In addition, FDR came to have an intense personal dislike for Mellon.

So in a chant that the Democrats made a theme song during the campaign, Mellon was portrayed as co-driver in the train wreck engineered by Hoover:
Mellon pulled the whistle / Hoover rang the bell
Wall Street gave the signal / And the country went to hell.
Republicans Join the Attack on Hoover

It got worse for Hoover, as the outcry of the Democrats was joined by maverick Republicans:
  • In the Senate, outgoing Republican Chairman of the Banking Committee, Sen. Peter Norbeck (S.C.), found New Yorker Ferdinand Pecora to become the General Counsel to the Committee to investigate the 1929 collapse. This is the man who was called "The Hound of Wall Street."
  • In the House, Republican Chairman of the Banking Committee, Rep. Louis Thomas McFadden (Pa.), moved to impeach Hoover in 1932 and thereby induced Mellon to resign within days.
The Pecora Committee.  The Committee that was created by Senate Resolution 84, introduced March 2, 1932, authorized the Committee on Banking and Currency to investigate “practices with respect to the buying and selling and the borrowing and lending” of securities.

During the first 11 months of its work, the Committee got little done as banking executives refused to produce bank records and evaded questions. In early 1933, at his wits end because of the stalling of banks and securities firms, Committee Chair Sen. Norbeck made what he called a "happy discovery" and hired a new chief counsel, former New York deputy district attorney Ferdinand Pecora.

Pecora ensured he would be kept on by the Democrats by going right to work using the Committee's subpoena power and the glare of publicity. The results were swift and momentous, and they reached  unexpected places.

The Impeachment Resolution. Meanwhile, in early 1932 Republican Rep. McFadden was creating havoc in the House. Born in Bradford County, Pa., he graduated from a commercial college in Elmira, N.Y. and worked his way up to be president of the First National Bank in Canton, Pa. In 1914, McFadden was elected from Pa. to the 64th Congress and he was reelected to the nine succeeding Congresses, chairing the House Committee on Banking and Currency from 1920 to 1931.

His main banking legacy was passing the McFadden Act of 1927, limiting federal branch banks to the city in which the main branch operates. McFadden was a sworn enemy of the Federal Reserve, which was run, he said, by Jewish banking interests who controlled the USA and deliberately caused the Great Depression.

When McFadden moved to impeach President Herbert Hoover in 1932, he also introduced a charge of conspiracy against the Fed, whose Chairman ex officio was the Treasury Secretary. (The following year, in late May, as Pecora's investigation for the Senate was hitting its crescendo, he introduced House Resolution No. 158, calling for impeachment of Treasury Secretary Woodin, two assistant Secretaries, the Board of Governors of the Federal Reserve, and the officers and directors of its twelve regional banks. In 1934, Drew Pearson reported in his column that McFadden had been "extensively" quoted "in support of Adolf Hitler".)

The GOP was in a corner nationally. Even within the GOP, Hoover was isolated. A joke told at the time was that Hoover asked Mellon's replacement as Treasury Secretary, Ogden Mills, to lend him a nickel to buy a soda for a friend. Mills is said to have replied laconically: "Here's a dime. Treat all of them."

The June GOP and Democratic  Conventions

To be fair, Hoover was hamstrung by the small-government orientation of his party in the face of a huge crisis. He had experimented with some public-works initiatives, but they were too isolated and tentative to have much impact on the economy.

The Republican convention in Chicago in mid-June 1932 had a six-point economic program. Point 3 was: "To stand steadfastly by the principle of a balanced budget."  Point 4 was: "To devote ourselves fearlessly and unremittingly to the task of eliminating abuses and extravagance and of drastically cutting the cost of government so as to reduce the heavy burden of taxation." In short, the GOP was committed to cutting spending despite a 25 percent unemployment rate, which has to be viewed with hindsight as a strategic error as well as a humanitarian failure.

The editors of the New Republic published a scathing editorial lacerating Herbert Hoover’s defense of his administration, on October 19, 1932:
Hoover’s claim to credit for a large public-works program is wholly false. Public works have greatly contracted during the depression. He has fought every measure which really would have led to a net expansion. If he had wanted at all costs to aid the unfortunate and increase prices, he would have enlarged governmental expenditures and would have borrowed the money with which to do so. Thus he would have risked further depreciation of bond prices and injured the creditor class. What he really did was to try to save the capitalist system by saving the creditors at the expense of the population at large, letting the devil take the hindmost.
However, the Democratic convention later that month, also in Chicago, followed the GOP line on the balanced budget, and FDR embraced the convention's platform. For years FDR would pay lip service to the balanced-budget program by presenting the Congress with deficit-free budgets - but he then added emergency funding to address unemployment, a practice that more recent Presidents have used to finance military spending. As FDR said in a campaign speech in Pittsburgh in 1936, the year that John Maynard Keynes published his game-changing General Theory:
To balance our budget in 1933 or 1934 or 1935 would have been a crime against the American people. ... [W]e should have had to set our face against human suffering with callous indifference. 
For this decision to spend government money when private money was scarce, Keynes hailed FDR as a "Trustee for those in every country who seek to mend the evils of our condition by reasoned experiment within the framework of the existing social system." In his Open Letter to FDR in December 1933, Keynes said:
[I]n the first stage of the technique of recovery I lay overwhelming emphasis on the increase of national purchasing power resulting from governmental expenditure which is financed by loans and not by taxing present incomes.
The two leading candidates at the Democratic convention were FDR and former NY Governor Al Smith. FDR's staff spoke privately to the next-leading candidate, John Nance "Cactus Jack" Garner, Speaker of the House, offering him the Vice Presidency in return for his support of FDR; he agreed. At the next ballot, FDR won the nomination.

The 1932 General Election

It was a terrible year to raise money for FDR's campaign. The Democrats had a considerable deficit when the election rolled around. Frank Walker, treasurer of the Democratic National Committee, did the best he could. The DNC spent about $2.2 million, or $500,000 less than the Republicans.

FDR's top two supporters (both contributing money and asking others for money) were John J. Raskob, banker and automobile manufacturer (GM), who served as Chairman of the DNC, and Will Woodin. Other major donors were Bernard Baruch, financier; Vincent Astor, Chase National Bank; William Randolph Hearst, newspaper publisher; R. W. Morrison, of San Antonio, Texas; M. L. Benedum, Pittsburgh oil and gas operator.

The anti-Wall Street mood in the country produced the numbers that FDR hoped for. In the general election in November, the election returns turned the 1928 numbers upside down. The victory this time went Democratic, with FDR capturing 57.4 per cent of the votes to Hoover's 39.7 percent; the electoral college split 472-59. In Suffolk County, N.Y, where Woodin had a summer home since 1912, Hoover beat FDR, by fewer than 10,000 votes - a sharp drop from 1928 when Hoover carried the county by more than 21,000 votes.

Nationally, the GOP was ahead by 50 in 1928 on the Real Clear Politics index of party support at the polls. Most of the time, 60 percent, the index varies between plus and minus 30 points. By 1936, the GOP score dropped down to -119, a plunge of 169 index points. This is the largest shift in the electoral winds on the RCP chart covering 1928-2012.

The election may be said to have hinged on Hoover's tentativeness in dealing with the stock-market crash, the bank panics and unemployment. A major crisis requires a major response. His efforts to encourage employment, limited by members of his own party, didn't have much effect. The editors of the New Republic in October 1932 summed it up with an astonishingly 21st-century view of Hoover's error (a theme we return to in the last chapter):
Hoover believed he was a wholly innocent man pursued by fate. But the origins of the Crash of 1929 were interwoven with his own past. He led the country up the mountain of unbridled capitalism and to the brink of the precipice, and he took credit for the ascent. … [H]is defense of “sound money” [and] balancing the budget was a bankers’ policy, pursued in the interest of financial institutions—our great creditors. … It is either disingenuous or stupid to represent this course as being in the immediate interest of debtors, farmers, and the unemployed. On the contrary, it shifts to them a major part of the losses of the [D]epression. [T]he rigid economy necessary to produce a balanced budget limits governmental expenditures at the very time when it is most necessary to expand them as a means of unemployment relief. [D]irect aid to debtors and a really adequate program of public works … may create employment [and] put money in circulation. “Traitor to his class” Roosevelt tempered his objectives with the spirit of compromise. Friends and enemies alike had to admit that FDR was a political genius.
During the interim between November and March, Hoover wanted FDR to sign on to every significant move he considered making. FDR refused to take on his responsibilities prematurely. The Depression  changed public opinion about Hoover's understanding of the economy and his ability to fix things.  Voters were disappointed in Hoover. FDR's actions in New York State showed that more could be done for the economy than Hoover was willing to do.

The Exiting Treasury Secretary

It is interesting to speculate what might have happened if Andrew Mellon had not been so exasperated with attempts by Rep. McFadden and Wright Patman and other to impeach him starting in January 1932 and had stayed on. I speculate that a likely outcome is that President Hoover might have taken some of the actions that FDR and Woodin took a year after Mellon resigned.

Instead, after Mellon resigned in February 1932, Ogden L. Mills took over until a year later, when on March 5, 1933, FDR took over with Will Woodin at the helm of the Treasury him. (Hoover meanwhile sent Mellon to London as U.S. Ambassador for the remainder of his term.)

Under the 1913 Federal Reserve Act, the Treasury Secretary was also ex officio chairman of the Federal Reserve Board (later, the law was changed to provide for an independent Chairman). Mills was therefore at the top of the two institutions that were supposed to be addressing bank panics. Mills was a competent lawyer but was part of a system that was not equipped to address the problems it faced.

Born in 1884 in tony Newport, R.I., Mills graduated from Harvard College in 1904 and Harvard Law School in 1907. He was a loyal delegate to the Republican National Conventions of 1912, 1916, and 1920, having won election to the New York state senate in 1914. He resigned in 1917 to enlist in the US Army and was discharged with the rank of captain. Starting in 1921, Mills won three successive elections to the US House of Representatives. In 1926, he ran on the GOP ticket against incumbent Al Smith for Governor of New York and was defeated.

In 1927, President Calvin Coolidge appointed Mills undersecretary of the Treasury, where he served under Andrew Mellon. Since Mellon spent much of his time in Europe, President Hoover came to rely heavily on Mills, who was faithful to the GOP Hard Money cause.

This background meant that in the midst of the financial panic and high levels of unemployment, Mills kept calm and called for a balanced Federal budget. As more banks closed and workers became unemployed, tax revenues fell, so a balanced budget meant swift deep cuts in government spending and higher tax rates.

After his retirement from the Treasury, Mills attacked FDR's policies in several books that did nothing to stop FDR's massively one-sided reelection in 1936. Mills died the following year in New York City.


Picking the Cabinet

The cabinet short list as of December 9 included Senator Carter Glass or Bernard Baruch as Treasury Secretary. Will Woodin was listed as a probable Commerce Secretary - the job that Hoover had filled.

Biographies of Carter Glass say he was offered the job of Treasury Secretary and turned it down. A widely reported AP story on February 21, 1933 reports just that.

But a frequently cited tale suggests that FDR was still wondering whether Glass or Woodin would be a better choice. Some advisers to FDR urged him to keep Glass in the Senate where his seniority was important. Either FDR's staff made their recommendation or Glass took himself out, but in the end a message went to FDR from his staff saying that "a wooden frame for the swimming pool is preferred to a glass one" (the Warm Springs center had under way a glass-enclosed swimming pool).

Woodin was offered the job. He had already been working closely with FDR in February. He was perfect for the position – a Republican, a Main Street business executive of prominence, a friend of FDR – someone who could be trusted with the huge job of making sure that FDR's remedies for the financial disaster and the bank panics would work. He was not from the banks or Wall Street, but he knew them and vice versa, all the better to take them on.

Another person who would be on FDR's team was Joe Kennedy, who Kennedy graduated from Harvard in 1912 announcing a plan to earn a million dollars by 32. Within 20 years, he headed a bank that he rescued, managed a major Boston shipyard, and helped facilitate the merger of RKO, salvaging the U.S. film industry. He was known as a bloodless investor. But FDR is his match. When FDR was Assistant Secretary of the Navy in 1917, Kennedy refused to release ships his private shipyard had built until the government had paid for them. FDR sent in the Marines, earning Kennedy’s respect and, in 1932, his support – and brought with him William Randolph Hearst.

Kennedy hoped to be appointed Secretary of the Treasury and was disappointed when Woodin got the job. But FDR put Kennedy on the team to head the Securities and Exchange Commission, with FDR commenting in private: “Set a thief to catch a thief.” (Kennedy does an excellent job.)

In the meantime, Hoover was as panicked as the banking system he was supposed to calm. He begged FDR to join with him in supporting certain measures that would stem the panic. Ogden Mills could not bring himself to deviate from the balanced-budget orthodoxy, and after the election in 1932 he was no more eager or willing than Hoover to take strong action.

However, FDR was become by this time a consummate politician and was not going to dilute the impact of his presidency by allowing Hoover to take his share of credit for any employment-creating or panic-reducing measures that might be introduced during the months before Inauguration. In the immortal words of a later era, FDR let Hoover "twist slowly in the wind" while instructing Woodin and other members of the Cabinet to be ready to take action on the day FDR took charge.

Harding was weak and had a strong cabinet that included Herbert Hoover and Andrew Mellon. Hoover was strong and had a weak cabinet except for Andrew Mellon. FDR was a strong President but he had a broad agenda, so he needed strong, detail-oriented managers in his Cabinet, and Will Woodin exactly filled the bill. It was a good match in many ways. Unfortunately, powerful forces unleashed to solve one big problem may create other ones. That is a story for the next chapter.

Notes

Data on GOP Strength 1928-2016: Real Clear Politics Blog http://bit.ly/1SkadCq.

Warm Springs Purchase, 1926: Jean Edward Smith, FDR, New York: Random House, 2007, pp. 208-217.

Warm Springs Pub,ic Relations: Disability Museum, http://disabilitymuseum.org/dhm/lib/detail.html?id=942

Raskob: "Everyone Ought to Be Rich," Ladies Home Journal, August 1929.

Balanced Budget: FDR Library, http://www.fdrlibrary.marist.edu/aboutfdr/budget.html.

Keynes: Open Letter to President Roosevelt

1924 and 1928 Conventions: FDR Library.

1928 Election: Paul F. Boller, Jr., Presidential Campaigns (Oxford University Press, 1996).

1932 Convention: Paul F. Boller, Jr., Presidential Campaigns.

1932 Hoover Policies: The editors of the New Republic (October 19, 1932),

1932 Votes: Paul F. Boller, Jr., Presidential Campaigns. Suffolk County: “Normal Rep. Vote Cut Heavily," East Hampton Star, Nov. 11, 1932, p.1.

Ogden Mills: Abbreviated from the The Federal Reserve History Gateway bio of Ogden Mills.

Cabinet: “Washington Inside and Out," East Hampton Star, Dec. 9, 1932.

Links to other chapters.