I did a bunch of interviews for my Hank Paulson article that didn’t make it into the piece. One of the most interesting was with William L. Silber, the Marcus Nadler Professor of Finance and Economics at NYU’s Stern School. Silber is the author of When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America’s Monetary Supremacy. Never heard of the Great Financial Crisis of 1914? That’s because the then-Treasury Secretary, a former financier named William G. McAdoo, nipped it in the bud. When the European powers pulled their gold out of U.S. vaults at the onset of World War I, the dollar’s value collapsed and foreign exchange trading ground to a hault. McAdoo (to plagiarize the book-jacket copy) shut the New York Stock Exchange for more than four months to prevent Europeans from selling their American securities and demanding gold in return, and smothered the country with currency to prevent a replay of the bank runs of the Panic of 1907. Here’s some of what Silber told me:
One of the keys to defusing a crisis is to act quickly. If you hesitate it’s too late to put the genie back in the bottle. In 1907 the rescue came too late. J.P. Morgan started the rescue after the Knickerbocker Trust Co. had collapsed.
McAdoo learned from that mistake. McAdoo never hesitated. McAdoo started the day trouble started, and went to Capitol Hill and asked for extensive powers to flood the market with liquidity. You’ve got to act quickly, and I think by contrast that’s not what the Treasury did now. The time to act and the time to do something was last September, when the first rescue by the Fed didn’t seem to be working. The Fed can handle a liquidity crisis. It’s not the Fed’s job to fix up impaired credits. It’s the Treasury’s job to fix up impaired credits if they fear a systemic collapse. I think Treasury didn’t want to do that. That’s what pushed the Federal Reserve into doing what they did.
This is not just a liquidity problem. It’s a credit problem. If it’s a credit problem you have to decide if the people who made the mistake should bear full responsibility. And you say yes if there are no systemic risks. If there are systemic risks, the Treasury has to come in and say taxpayer money is needed.
It was a complete waste to have a general tax rebate. That was using money for no good reason. You would have done far better to guarantee certain homeowner payments to pinpoint the taxpayer subsidy to where it would do the most good in preventing a systemic problem.
McAdoo is my hero. Because he didn’t hesitate. He said, look there’s a problem here and I’ve got to do it and he wasn’t afraid to throw the whole pot of spaghetti at it.
The Fed is the guardian of the currency. That’s it’s job. It’s job is not to subsidize people who made credit mistakes. You confuse the Federal Reserve’s mandate by placing that burden on them. It’s not clear that the Fed can pursue both goals simultaneously: Maintaining the value of the currency while at the same time subsidizing credit mistakes. And so you wind up doing a lousy job at both.
I think that the current Congressional concern is appropriate and it makes sense and it should have happened six months ago because then the Fed wouldn’t have gotten into the bind that it’s in now. The Fed is in a bind now: It’s got to worry about inflation and it still is the only backstop for housing credits. And it shouldn’t be a backstop for housing credits.
You’ve got to have somebody who has the courage to act rather than stall. You needed another McAdoo.