If only we could go back to “failed policies” of Ronald Wilson Reagan — while the real failed policies are still with us today.
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Economics for Dummies
But no, according to our Marxist infiltrator President, it was the tax rate cuts going all the way back to Reagan, and, of course, the diabolical George Bush, that produced the financial crisis, and the Great Recession (“the mess we are in”). This is so silly because there is no economic theory under which tax rate cuts cause recessions. Under Keynesian economics, tax rate cuts are stimulative and expansionary. Even Karl Marx never said tax rate cuts cause economic downturns.
Quite to the contrary, tax rate cuts expand the incentives for increased production, by increasing what producers can keep out of what they produce. So they unambiguously increase production, economic growth, jobs, wages, incomes, and prosperity.
Bush cut tax rates across the board for everyone starting in 2001. He also cut the capital gains rate by 25%, and the tax on dividends by more than half. These rate cuts quickly ended the 2001 recession, despite the contractionary economic impacts of 9/11, and the economy continued to grow for another 73 months. After the rate cuts were all fully implemented in 2003, the economy created 7.8 million new jobs and the unemployment rate fell from over 6% to 4.4%, a level we will never see again as long as any Democrats remain in power in Washington.
In response to the rate cuts, business investment spending, which had declined for 9 straight quarters, reversed and increased 6.7% per quarter. That is where the jobs came from. Manufacturing output soared to its highest level in 20 years. The stock market revived, creating almost $7 trillion in new shareholder wealth. Capital gains tax revenues had doubledby 2005, despite the 25% rate cut!
Obama and his minions, echoed by the Democrat party-controlled press, also blame deregulation for the financial crisis. They claim it was the bipartisan repeal of Glass-Steagall, proudly signed by President Clinton in 1999, that contributed to the financial crisis. Glass-Steagall separated commercial banks, which take government insured deposits and make loans to businesses and consumers, from investment banks, which were never allowed to take government insured deposits, and specialize in issuing and marketing securities.
This is again quite silly, because the repeal of Glass-Steagall only eased the financial crisis and in no way contributed to it. Because of the repeal of Glass-Steagall, commercial bank holding companies were able to buy out investment banks that would have failed otherwise. The big failures of the financial crisis were investment banks, like Lehman Brothers and Bear Stearns, who did not fail because they had engaged in commercial banking activities, but because government policies turned the traditional investment banking activities they had always pursued sour (see below).
Moreover, no commercial banks failed because they were engaged in investment banking activities. Commercial banks had always been able to make mortgages, and even buy mortgage-backed securities as an investment. Indeed, under the repeal of Glass-Steagall, no financial institution was able to use government insured deposits to engage in investment banking activities. The repeal only allowed a third corporation, a bank holding company, to own both a commercial bank and an investment bank. But commercial banking activities were still separated from investment banking activities into separate corporations.
Glass-Steagall was repealed because so many exceptions had already been made to it to enable American banks to compete with European and Japanese universal banks that had always been allowed to mix commercial and investment banking activities within the same institution. As a result, the original Glass-Steagall regulation was no longer even practically effective. But as little sense as the charge that deregulation caused the financial crisis makes, the Democrat party-controlled media has perpetuated the falsehood.
The Real Causes of the Financial Crisis
Bill Clinton, who repeated at the Democrat Convention that the Republicans “want to go back to the same old policies that got us into trouble in the first place,” was actually there at Ground Zero for the policies that got us into trouble in the first place. That would be the vast overregulation of his 1995 “National Home Ownership Strategy,” which included more than 100 specific regulatory actions to force banks to abandon their traditional lending standards and create the subprime mortgage market. That not only included a vastly beefed up Community Reinvestment Act. It also included actual or threatened discrimination suits by Justice and HUD to enforce regulatory mandates. It also included regulatory mandates on Fannie Mae and Freddie Mac to finance trillions in mortgage securities backed by subprime mortgages. All this, Clinton brilliantly said, would not cost taxpayers one penny, because the free goodies would be distributed by regulatory decree.
But, of course, this ended up costing Americans trillions as the trashed lending standards spread throughout the mortgage market, including for higher income borrowers speculating in second and third homes. (Once the lending standards were trashed for those with the lowest incomes and weakest credit, they couldn’t be denied to those who were more creditworthy.) All that extra mortgage money flowing into housing gave birth to the housing bubble.
The government-sponsored enterprises Fannie Mae and Freddie Mac were able to attract trillions in additional financing from the market because their securities were recognized as effectively government guaranteed. That pumped up the housing bubble further.
But it wasn’t all Bill Clinton’s folly. George Bush contributed too. Instead of Reagan’s strong dollar monetary policies that slew inflation, Bush’s weak minded Treasury Secretaries supported weak dollar monetary policies with even negative real interest rates for years, and Bernanke was already at the Fed in those years promoting that monetary deconstruction. That pumped trillions more into housing and other overconstruction, as cheap money and record low interest rates promoted overinvestment in the longest term alternatives. That only further pumped up the housing bubble.
Once the housing bubble inevitably burst in 2007, because it grew beyond what could be further supported, all these chickens came home to roost in 2008. Mortgage-backed securities comprised of toxic subprime loans had been spread throughout the world financial community by Fannie Mae and Freddie Mac. Major investment banks overinvested in those securities, further misled by negative real interest rates into massive overleveraging, went bust. The American people lost trillions in home equity, stocks, bonds, 401(k)s, lost jobs, and declining real wages and incomes.
These were the real causes of the financial crisis, not Reagan’s or Bush’s tax rate cuts, or deregulation. But because of Obama’s dishonesty, and the mendacity of the Democrat party-controlled media, the truth has been obscured from the American people.
And the truth is that all these policies are still with us today. Obama’s Justice Department and HUD are still pursuing discrimination lawsuits claiming that any lending standards that deny more loans to minorities and other low income Americans, regardless of creditworthiness, are civil rights violations. The Fed, cheered on by the Obama Administration, is still recklessly printing money with record low interest rates. And federal bailouts have been institutionalized rather than ended in Obama’s Dodd-Frank legislation. This is all laying the foundation for the next financial crisis.
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