1919 farm crisis shows some bailouts hard to undo

[October 18, 2008]    WASHINGTON (AP) -- Asset prices plunge and a panic sweeps through international markets. The crisis threatens the livelihood and savings of millions of Americans. Congress enacts sweeping government intervention, putting aside faith in free markets to heal themselves.

Sound familiar? So went the farm crisis of 1919.

Global volatility in commodity prices threatened U.S. families back then in much the same way today's sinking housing prices led to a credit crunch that is wreaking havoc on retirement accounts and corporate borrowing.

When the U.S. bailed out the agriculture sector in the early 1930s, it forever changed the business of farming. While today's banking industry interventions are different in many ways, economists say it is worth noting that "emergency" Depression-era measures meant to protect farming families from short-term market swings have become near-permanent support at taxpayer expense.

"Probably no one at the time expected that almost 80 years later, very similar programs would still be on the books," said Scott Irwin, chair of agricultural marketing department at the University of Illinois at Urbana-Champaign.

The interventions of the 1930s succeeded in their goal of smoothing out the farm sector's booms and busts, said Neil Harl, an agricultural economics professor at Iowa State University. But once government ensured stability, it wasn't easy to step back and let the market find equilibrium on its own, he said.

Farm programs have such a strong political backing that last year's farm bill passed with veto-proof support and U.S. support for farm subsidies caused international trade talks to collapse this summer.

"A lot of farm groups are out there advocating policies they wouldn't have dreamed of some years ago," said U.S. Secretary of Agriculture Ed Schafer.

When Schafer was governor of North Dakota in the early 1990s, the common refrain from farmers was "get the government out of our face," he said. Farmers chafed under Depression-era programs that limited their planting acreage. Their resistance led to the 1996 Farm Bill, known as the Freedom to Farm Act, which aimed to return the farm sector to the free market.

Ultimately, the 1996 bill eliminated production management, but didn't sweep away subsidies. Schafer said he was surprised this year at the lobbying from farm groups who want "permanent disaster" payments and other supports.

Farmers "kind of want to take the risk out of agriculture," Schafer said.

Numerous efforts to do away with the farm supports have failed. Even as the number of farmers has dwindled, subsidies have continued. Taxpayers paid farmers $177.6 billion in subsidies between 1995 and 2006, according to the Environmental Working Group, which tracks subsidies.

The subsidies could help farmers weather today's economic turmoil. While commodity prices will likely be too high this year for farmers to get direct payments for their crops, the Farm Bill has provisions that give farmers special access to loans.

The government-backed loans could help farmers get access to credit even as banks cut back on lending, said Jim Radintz, director of farm loan programs for the Farm Service Administration. The agency guarantees up to 95 percent of the value of a loan to a farmer who might not otherwise qualify for credit.

The FSA guaranteed $2.16 billion worth of loans in 2007. Early estimates show it guaranteed $2.5 billion in 2008, Radintz said. He expects that figure to climb in 2009 as rural banks tighten standards and more farmers seek assistance.

The basis for today's farm programs can be traced to the Agricultural Adjustment Act of 1933. The sweeping act was part of Franklin Roosevelt's New Deal legislation and sought to boost farm prices in part by reducing production, giving birth to programs that paid farmers to leave some acres untended.

There was vigorous debate in Congress before the act was passed, Irwin said. Many legislators feared the intervention would become permanent. But their arguments were overruled as the economy and social fabric of rural America began disintegrating during the Depression, Irwin said.

So-called "Dollar Auctions" became a regular occurrence in farm states like Iowa. When a farmer's property was foreclosed upon, the bank would auction off the property publicly. Neighbors sometimes arrived at the auctions toting shotguns to ensure the original owner could buy back the land for $1.

"People were starving," Irwin said.

But even as crop prices climbed and the number of farmers dwindled farm supports stayed in place decade after decade.

Harl said this happened partly because of the unique aspects of agriculture. It is more dependent on weather, for example, than virtually any other business.

Farmers also have a tendency to overproduce, Harl said. They need pay for their land and equipment each season, regardless of how much money they get for their crops. To help pay for that overhead, farmers will grow as much food as possible. A factory owner, on the other hand, can close its plants or lay off workers to trim costs.

Because banking and farming are so different, it's not certain that that today's bailouts of the financial sector will permanently change that industry, said James Hamilton, professor of economics at University of California, San Diego.

Today's bailouts involve buying preferred shares in banks, backing loans and purchasing toxic assets, as opposed to the farm programs' price supports and production controls. That means if and when the economy recovers, the U.S. can sell off its investments and put the bailouts to rest.

Of course, politicians will ultimately decide whether or not to relinquish their control over mortgage giants Fannie Mae and Freddie Mac, and give up ownership stakes of nine of the largest U.S. banks.

"We have to make a decision," Hamilton said. "Is that the new reality?"

[Associated Press; By CHRISTOPHER LEONARD]

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