On the Continuing Political Aftermath of the Great Recession and the Financial Crisis


In my new The Week column, I write about the GOP’s problem — particularly Jeb Bush’s — with the Great Recession and Financial Crisis: Republican George W. Bush happened to be president when it happened. That is a tough-to-remove stain on the Bush brand and the GOP brand. Now as I wrote awhile back, “Obama didn’t end the Great Recession that Bush didn’t cause.” W.’s tax cuts/budget deficits/income inequality/financial deregulation aren’t the real story.

But life isn’t fair. Presidents get much of the blame or credit for what happens when happens when they’re in the Oval Office. What’s more, the economic collapse has tempered the public’s enthusiasm for pro-market policies. Now it is certainly worthwhile to try and correct the record on causality. I think the GR&FC were more or less a replay of the Great Depression, where the Fed took a modest downturn in the making and made it much, much worse. In their Financial Crisis Inquiry Report dissent, Keith Hennessey, Douglas Holtz-Eakin, and Bill Thomas outline a variety of domestic and international factors: credit bubble, housing bubble, nontraditional mortgages, credit ratings and securitization, financial institutions concentrated correlated risk, leverage and liquidity risk, risk of contagion, common shock, financial shock and panic. In that same report, my colleague Peter Wallison states “the  sine qua non of the financial crisis was U.S. government housing policy.”

As I write in The Week: “Perhaps Republican policymakers will eventually be successful in persuading the public that it was mainly the Fed or perhaps Fannie Mae and Freddie Mac that caused the downturn and not Bush and the big banks. But it will likely be a long, hard slog to win that PR battle. After all, most Americans still think it was Wall Street and Hoover that caused the Great Depression — even though economists have mostly blamed the Fed since the 1960s.”

Meanwhile, push for (a) policies to grow the economy both quickly and broadly, (b) higher equity capital requirement to make big banks more resilient, (c) a less debt-subsidized economy, which would also improve resiliency.


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  1. Southern Pessimist Member
    Southern Pessimist

    “Meanwhile, push for (a) policies to grow the economy both quickly and broadly, (b) higher equity capital requirement to make big banks more resilient, (c) a less debt-subsidized economy, which would also improve resiliency.”

    I think that is as succinct and correct as a policy prescription could be. But I don’t think that it is enough. I think the answer to the economic situation we face has to address Tyler Cowen’s recent analysis at NYTimes.com that we are likely in the early stage of a permanent  economic reset. A B and C are correct but the next president needs to deal with the regulatory and bureaucratic burden that is so stifling while at the same time pointing out that this reset doesn’t have to be permanent. And of course solve the entitlement/budgetary debt problem as well.

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  2. Ricochet Member

    I don’t see how the Fed was to blame for the FC.  The Great Depression, yes, as the Fed adopted a tight monetary policy.  But my impression is that in the FC, the Fed quite successfully expanded the money supply to counteract the tightening caused by much stricter bank lending standards, and succeeded in maintaining price stability.

    My opinion is that the FC was caused by:

    1. US housing policy which encouraged overbuilding, including the implicit guaranty to Fanny and Freddy.
    2. Very poor risk assessment in the financial markets, abetted by the (government mandated) rating services and very unwise “insurance” (in the form of Credit Default Swaps) principally issued by AIG.
    3. Irregularities in the handling of one or two major bank failures (IndyMac and WaMu) which caused market uncertainty making it difficult for other banks to raise capital.

    By itself, the FC would probably have lead to a modest recession.  In my opinion, the real cause of the “Great Recession” was the foolish spending and regulatory policies of the Obama administration.

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  3. SParker Member

    Arizona Patriot:I don’t see how the Fed was to blame for the FC.

    The Panic of 1907 reasonably asserts that any financial panic is a perfect storm, a collection of bad (liquidity destroying) things and a trigger, that last grain of salt that causes the supersaturated solution to precipitate.  I assert the Panic of Aught Eight was caused by my reading that book right before it happened  (and having Friedman and Schwartz’s The Great Contraction on the coffee table is a contributing factor).  It can’t have been a coincidence.

    The Fed has a lot of control over the money supply (but never as much as it would like), so it’s never going to be an innocent bystander.  The standard story is that is that it was too loose followed by too tight.  That sort of makes sense of commodity and real estate prices going nuts (rationally nuts) followed by a boatload of auction rate security auction failures.  Mark-to-market accounting for the banks couldn’t have helped the panic phase, and the Fed had the power (I believe)  to just say “no, that’s a stupid thing to do to shaky banks in a panic,” but didn’t use it.

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  4. philo Member

    James Pethokoukis: …push for (a) policies to grow the economy both quickly and broadly, …

    I’m not sure many people appreciate just how nearly impossible this will be.

    The policies of the last six years have prevented a real recovery while pushing the economy/society deep into the post-stall portion of the employment curve.  In normal times, a sufficiently growing economy would mean more jobs and less unemployment.  We are not in normal times.  As soon as the Progressive boot is off the neck of this economy and, as you say, policies to really grow the economy are put in place, there will begin to be more jobs. However, as those new jobs will most definitely be filled, there will be a simultaneous effect of optimism among those who have been driven from the official employment pool and they will reverse course, probably in more of a rush than a trickle.  Consequently, the near term result of implementing true growth policies will be an increase, a spike, in the reported unemployment numbers.  And just as the left (pols and media alike) have ignored the real reason for the fake low unemployment numbers today, they will surely demagogue in full force the “mean-spirited” policies that are at that point actually helping the country.  The pressure will be immense to reverse course long before things are allowed to unwind from eight (or more) years of this madness.  Ignoring it will mean a heavy price at the ballot box.

    — Continued —

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  5. philo Member

    — Continued —

    A President willing to weather this storm will surely risk re-election and congress will surely buckle long before he does. I fear the long term commitment to these policies…the medicine required to fix the Obama economy…is well beyond an electorate that has lost the virtues required to be worthy stewards of the American gift of liberty that they seem stubbornly unable to understand and appreciate.

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