Warren Buffett Puts on His J.P. Morgan Hat, Saves the World

[NOTE: This is a guest post by Dan Bischoff]
America's greatest recession, bar only the Great Depression of 1929 and the capitalist collapse of 2008, was the Panic of 1893. Its immediate cause was flimsy railroad financialization, which destroyed several banks at one go. America was then on the gold standard (so you'd think there could never have been a panic in the first place, at least by goldbug lights), and President Grover Cleveland faced a possible run on America's gold reserves.

At the last minute, J.P. Morgan came forward with a syndicate of bankers to offer America $62 million in European gold in exchange for highly lucrative U.S. bonds. Crisis averted, time won, and Morgan entered those airy reaches where tycoons become statesmen. (A century later he even got a book about his role, J.P. Morgan Saves the Nation.)

Is there any question that Warren Buffett, after singlehandedly saving Bank of America (BAC) this morning with a timely $5 billion investment, is today's merchant prince? BofA shares soared 24 percent after the opening this morning, and other financials tagged along. "Saint Warren" has blessed the markets, and stocks across the board have rallied -- including other stocks in Buffett's portfolio, like Wells Fargo & Co. (WFC).

One day my prince will come
Morgan actually performed this service, or one like it, several times, rather famously reorganizing the coal/steel/railroads sector a little after his gold transfer in a deal that lasted through World War II. And Buffett has too, having been the prince of last resort in 2008, when he made a similarly timely investment of $5 billion in Goldman Sachs that by all accounts has made a tidy profit, paying a ten percent dividend for Buffett's company, Berkshire Hathaway (BRK.A).

Indeed, Prince Al-Waleed performed a similar service for Citibank (C) during the 2008 crisis. There are princes everywhere you look.

But waiting for princes is no way to run an economy, or a nation, much less the planet. President Cleveland found that out the hard way: When the news of just how profitable those U.S. bonds were to Morgan and his syndicate -- they sold them almost immediately at a substantial markup -- Cleveland was denounced as incompetent, and worse.

As Cleveland's Democrats squabbled among themselves about getting off the gold standard (for a bi-metal system with silver, which would have lowered the cost of money in the economy), the hard-money, solid-gold Republicans roared into the election of 1896 behind William McKinley. McKinley was arguably the most corporate-friendly president in history; it was his policies Karl Rove and George W. Bush said they hoped to revive.

Princes don't need no stinking presidents
The story of the last 40 years of American life has been the sinking of politicians and the rise of businessmen. Buffett himself has referred indirectly to this reality by chiding his fellow rich folk to encourage the government to raise their taxes last week in the New York Times. Clearly, he thinks Congress is incapable of doing the obvious on its own.

Businessmen are very good at making money for themselves, but that's not the same as expanding the economy for everyone, as Paul Krugman pointed out this week. In fact, they are incapable of even understanding the larger purposes of the general economy, because they are so focused on their own bottom line. That's why the system needs a strong government that can enforce the rule of law, build confidence in the honesty of the system, and stymie the potential for kleptocracy in every capitalist country.

The money supply problems that bedeviled Cleveland are gone, or at least suppressed, since Richard Nixon took us off the gold standard and we can expand the currency at will. But what many people did not realize at the time was that decision changed the full faith and credit of the United States: It no longer lay in vaults filled with yellow metal, it lay in our political system, in the men and women elected to oversee our safety and economy.

Maybe things are worse than we thought.

Dan Bischoff writes about art for The Star-Ledger in New Jersey; He was European editor for WorldBusiness and National Affairs Editor for The Village Voice.