Hoover’s ghost hovers over business crisis

President George W. Bush’s lack of boldness last week in responding to the widening pattern of business abuse presents Congress with a challenge: Can it provide the new thinking and take the strong action required to prevent the business scandals from becoming a crisis of confidence that undermines the economy?


The president’s speech to business leaders appeared to signal a tilt toward government intervention. However, his actions bear a resemblance to the way President Herbert Hoover handled the “Great Crash” seven decades ago.

Hoover faced an economic crisis that turned out to be unprecedented.

Although a believer in limited government, he “made the first attempt to use the national government to fashion effective means for controlling the violent fluctuations of the American economy,” according to a book by historian Albert Romasco.


But Hoover failed because his personal ideology and inclinations precluded him from making the policy leaps the crisis demanded. “His program was designed to serve the double purpose of overcoming the economic crisis while preserving the American system as he conceived it. His initial program exhausted the possibilities of voluntary cooperative effort,” Romasco wrote. The result was that “the new departure … was restricted by old ideas and old assumptions.”


While Hoover balked, Congress proposed federal lending, unemployment assistance and large-scale public works programs to deal with the depression. Many of these ideas became key elements of President Franklin Roosevelt’s New Deal.


Today’s problems are potentially as threatening as those that confronted Hoover. “These scandals have begun to have a macro-economic impact,” Columbia University Law Professor Jack Coffee told me. “When investors lose confidence in the market, the cost of capital rises, companies start having to use debt rather than equity financing, interest rates go up, the cost of capital goes up, and layoffs follow.”


Up to now, Congress has responded with more smoke than fire. “There’s a lot of grandstanding,” Charles Elson, director of the University of Delaware’s Corporate Governance Center, told me. House and Senate committees have hauled in alleged corporate abusers for show hearings. Despite fast action, the House has passed weak accounting and pension reform bills. The Senate is acting on pension legislation and a much stronger measure toughening accounting industry regulation.


To be truly effective, Congress must pass legislation that addresses other dimensions of the problem. “I hope the problem doesn’t get too bad but it needs to be bad enough to get action,” a tough business reform supporter, former Federal Reserve Board Chairman Paul Volcker, told me.