If the Obama administration has its way, the “Great Recession” of our own time, like the Great Depression of three quarters of century ago, will be fondly and forever enshrouded in the clouds of politically inspired myth. The administration wants everyone to believe the myth of the averted depression, which is like the jobs saved part of its risible “jobs created or saved” metric, only larger and more breathtaking.
Even though things are bad today, President Obama and key members of his economic team repeatedly suggest that we should be thankful they are not a hundred times worse. No doubt we will hear this again tonight, when the president gives his state-of-the-union address. We will hear how the administration has performed a Herculean feat in pulling the country out of the downward spiral into another great depression.
In one of his 12 labors, Hercules diverted an entire river to cleanse the Augean stables. In the updated version of this ancient myth, Mr. Obama talks about the huge “mess” that he confronted upon coming to office. In his telling, this “mess” was years in the making — the result of a long period of unrestrained “greed and irresponsibility,” caused by excessive deregulation and a mean and uncaring reliance on “trickle-down economics.”
Over the last two years, Mr. Obama has never ceased inveighing against George W. Bush and — still more — against the ghost of Ronald Reagan, the biggest champion in recent time of anti-interventionist, free-market capitalism. Of course, the late president was also the sworn enemy of tax-and-spend big government.
Of Mr. Obama’s two great adversaries, Reagan is clearly the more potent, if less often cited. Reagan was an undeniably popular president upon leaving office, with strongly expressed ideas that influenced people of both parties and that continue to resonate in our own time. If Obamanomics is the antidote to Reaganomics, it is the antidote to a set of ideas and policies that led the country out of a long period of stagflation (under the Nixon, Ford and Carter presidencies) and into a new era of accelerated business creation, productivity and growth.
During his presidential campaign, Mr. Obama regularly denounced the repeal of the Glass-Steagall Act that separated commercial and investment banking. The repeal of this relic of Depression-era law-making was, he has insisted, one of the critical “deregulatory steps that helped cause this mess.”
The bill in question won broad support from both parties. It passed the Senate on a 90-8 vote, with the enthusiastic endorsement of ultra liberals like Chuck Schumer, the Democratic senator from New York, and was signed into law by then President Bill Clinton in 1999. During the heady days of the dot.com boom, Democrats as well as Republicans were affected by what the current administration might primly describe as an excess of Reagan-like deregulatory zeal.
Clearly annoyed by candidate Obama’s criticism of this piece of legislation, Mr. Clinton spoke out in its defense just a few weeks before the November 2008 election — when the country was in the full throes of the financial panic. He told BusinessWeek: “We still have heavy regulations and insurance on bank deposits, requirements on banks for capital and for disclosure.” He pointed out that big financial institutions in Europe have long been doing both commercial and investment banking. Finally, and most tellingly, he drew attention to the bill’s relevance to headline-making events of the day, saying: “I don’t see that signing that bill had anything to do with the current crisis. Indeed, one of the things that has helped stabilize (emphasis added) the current situation as much as it has is the purchase of Merrill Lynch by Bank of America, which was much smoother than it would have been if I hadn’t signed that bill.”
It is difficult to disprove a negative supposition (e.g. things are bad today, but think how more terrible they might be if the president hadn’t done this or that). There are, however, good reasons for doubting the notion that the Obama administration deserves credit for averting a second great depression.
First, it is simply a fact that most of the critical steps that were taken to stabilize the financial system predated the Obama presidency. That includes the passage of the Troubled Asset Relief Program (TARP) and government-encouraged consolidation within the financial sector that eliminated free-standing investment banks. These events happened during Mr. Bush’s term of office. For better or worse, Mr. Obama thought well enough of the Bush administration’s handling of the crisis to retain Ben Bernanke as chairman of the Federal Reserve and to move Tim Geithner, who had been in the thick of Bush’s crisis management team as head of the New York Fed, to the position of Treasury Secretary.
Second, no one — not even such left-leaning economists as Paul Krugman or Joseph Stiglitz — is hailing the administration’s $787 billion stimulus package as a landmark success. It was sold on the basis of being a desperately needed emergency measure that would keep unemployment from rising above 8 percent. That was a line in the sand that did not hold. Instead, unemployment moved to 10 percent, where it remains today.
Third, and finally, it is difficult to believe that this administration could have stumbled across a cure to the dread disease of another great depression when its diagnosis of various elements leading to the financial meltdown of 2008 is so clearly faulty. It critically overlooks government’s role in causing the crisis. As Roger Parloff wrote in Fortune magazine last January, “The fact that lenders were hawking outlandishly risky mortgages to people who were terrible credit risks was, in fact, no secret: It was bipartisan national policy.”
Prominent Democrats including Barney Frank, Christopher Dodd and Mr. Obama himself played a large and even dominant part in forging this bipartisan debacle through their support for the unregulated expansion of Fannie and Freddie, the government sponsored entities that underwrote or guaranteed hundreds of billions of dollars of suspect mortgages, and the promotion of ACORN, the community action association that brought pressure to bear on many banks to lower lending standards and grant mortgages to people who failed to pay them back. Having done so much to cause the problem through its actions earlier this decade, this same Democratic Party claque has gone out of its way to prevent a market-clearing solution by pushing mortgage foreclosure mitigation programs that keep home prices from finding a bottom.
This is a president — we will hear tonight — who is not afraid to “stand up to” the lobbyists and special interests. Yeah, yeah. Just don’t look for this president to mention that he himself has been one of the leading recipients of Fannie Mae and Freddie Mac campaign contributions. Don’t look for him to talk about his close ties to Franklin Raines, the former CEO of Fannie Mae who pulled down tens of millions of dollars in compensation and bonuses before being ousted in a $6.3 billion accounting scandal, and who went to become one of Mr. Obama’s top advisers in the presidential race. Don’t expect him to talk a whole lot about how, as a U.S. senator, he teamed up with Barney Frank in successfully opposing Bush reforms to clean up the two government-sponsored entities.
And he probably won’t bother to spend much time either on matters of current concern in this same area, such as why the government decided recently to cover an unlimited amount of losses at the mortgage-finance giants, or why the government has seen fit to give its blessing to multi-million pay packages for the CEOs of Fannie and Freddie. Funny that this should happen even as the president was going around the country screaming bloody murder about the big bonuses about to be handed out to “fat cat” bankers in the private sector.
The finger of blame, so freely wielded by this president, rarely points inward — to himself or any of the leading progressives in Congress.
None of this is to say that we should not worry about the possibility of a second major depression.
In following policies that can only lead to increased taxes, excessive borrowing, or both, and to greater uncertainties for anyone owning or running a business, the Obama administration may prevent a cyclical recovery and turn a bad recession into something considerably worse. That happened under two earlier presidents, Herbert Hoover and Franklin Roosevelt. Both of those men believed in the cure-all properties of big government and interventionist policies. In calling for so much public sector spending and “investment,” they killed off any real investment — meaning private-sector investment — and they created the Great Depression. It could very well happen again.
Is there any way out of the mess we are in today? I like to think so. A reader put it very nicely in responding to an earlier article of mine. As he wrote, “Mr. Obama has created or saved millions of Republicans.” If so, maybe he does deserve some credit for putting us on the road to recovery.