Dr. Martin Horning Presents "Puzzling Through the Financial Crisis" at LINC Luncheon
March 20, 2009
It pays to pay attention to history.
Martin Horning, Mount Union College economics professor, brought that reminder home to a large-capacity luncheon audience recently at Hoover-Price Campus Center during the monthly LINC Luncheon Series.
The program was “Puzzling Through the Current U.S. Financial Crisis.”
Horning agreed with the country’s present big-spending program to lift the depressed economy saying, “You have to spend massively,” a lesson that was learned during the Great Depression.
Using a PowerPoint presentation, Horning said the gross national product fell by nearly a third and unemployment reached 25 percent during the Great Depression in the 1930s.
He pointed out that nearly half of the financial institutions failed — 10,763 of the 24,970 commercial banks. Deflation was at 18 percent. The DOW Industrial Average fell 89 percent and the money supply fell by 28 percent. (1929-1930).
President Herbert Hoover raised taxes in 1932 to reduce the deficit and increased government spending. President Franklin D. Roosevelt closed banks for four days and increased the money supply despite near-zero interest rates to combat deflation. Taxes were increased again in 1937.
Included in lessons to be learned in our day, mentioned by Horning, are:
- Monetary policy has a role to play despite near-zero interest rates;
- The initial fiscal stimulus needs to be large (what government is doing today);
- Avoid stop-and-go fiscal policy;
- Avoid protectionist policies.
Preceded by the dot-com economic bubble collapse during the 1990s and the housing bubble burst from 2006-2008, Horning gave a timeline for the present financial woes the United States is experiencing:
- Sept. 7 2008 — the government takes control of Fannie Mae and Freddie Mac, a cost of $200 billion;
- Sept. 11 — Bank of America offers to buy Merrill Lynch;
- Sept. 15 — Lehman Brothers files for bankruptcy;
- Sept. 16 — Government loans $85 billion to AIG;
- Sept. 18 — Bailout discussion;
- Sept. 19 — Original proposal of $7.9 trillion bailout/rescue plan and 10-day suspension of short sales of financial stocks;
- Sept. 21 — Goldman Sachs and Morgan Stanley request becoming bank holding companies under Federal Reserve Oversight;
- Sept. 26 — Washington Mutual becomes the largest bank failure in U.S. history;
- Sept. 29 — Wachovia considers two buyers, Citigroup and Wells Fargo;
- Sept. 29 — House of Representatives rejects bailout package.
- Sept. 29 — DOW falls 770 points (largest one-day drop in history);
- Oct. 1 — Senate passes bailout package with added provisions;
- Oct. 3 — House passes the augmented bailout packages.
Horning said the financial crisis then spread from Wall Street to Main Street, impacting automobile loans, student loans, loans for meeting payroll, loans for covering costs of inventory, and interbank lending.
Other information provided by Horning is the American Recovery and Reinvestment Act provides for a $787 billion stimulus package with $288 billion in tax cuts, relief to state and local governments of $144 billion and infrastructure and science spending of $111 billion.
Also included are $81 billion to protect the vulnerable, $59 billion for health care and $43 billion for energy uses.
The financial bailout of $1.5 to $2.5 trillion encourages investors to buy up troubled assets, unfreeze the market for commercial, student, auto and credit card loans, and provide assistance for homeowners facing foreclosure, Horning pointed out.