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Special Report
Perpetuating Falsehoods
If only we could go back to “failed policies” of Ronald Wilson Reagan — while the real failed policies are still with us today.
(Page 2 of 3)
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.
About the Author
Peter Ferrara is Director of Entitlement and Budget Policy at the Heartland Institute, General Counsel of the American Civil Rights Union, Senior Fellow at the National Center for Policy Analysis, and Senior Policy Advisor on Entitlements and Budget Policy at the National Tax Limitation Foundation. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under President George H.W. Bush.
Letter to the Editor View all comments (19) | Leave a comment
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Appleby| 9.26.12 @ 7:27AM
The majority of us were in fact adults 30 years ago. The problem is the generation that knew nothing but the Reagan Expansion and who thought that what goes up will always go up regardless of what they did...and their children who believe, because Generation Whine is their parents, that all you have to do to get Goodies is Demand Them...and whose hopes are pinned on ObamaCare because it will see that their grandparents die before we have spent all their inheritance.
Alan Obama Fan Brooks | 9.26.12 @ 4:35PM
"and whose hopes are pinned on ObamaCare because it will see that their grandparents die before we have spent all their inheritance."
Now you're cooking with gas- you ought to be writing articles at AS.
Alan Obama Fan Brooks | 9.26.12 @ 5:04PM
"their grandparents die before we have spent all their inheritance."
...better Granny and Gramps die than us.
Pecos Pete| 9.26.12 @ 7:29AM
Why would anyone vote for Obama? Obama voters like being wards of the government. They like living in government housing and being provided with free food, telephones and TV. Public sector unions will vote for Obama because they will retire at 55 with a very nice pension and health benefits. Private sector unions will vote for Obama because they believe they can return to power ala the UAW and GM/Chrysler.
Class warfare and greed are the foundations of Obama Voters.
Crassus| 9.26.12 @ 10:27PM
"Class warfare and greed are the foundations of Obama Voters."
Stupidity too.
Von Mises Jr| 9.26.12 @ 8:21AM
Peter Ferrara offers a fine overview here of the real versus MSM manufactured economic history of the last thirty years. He is correct that government interference and Fed toying with monetary policy causes booms and busts.
But we must realize that the alternative to the cyclical recoveries is the Great Depression. Continued government interference in farming, steel, railroads, work projects (stimulus) and gold prices by FDR turned a recession into a depression.
This is happening currently with de facto nationalization of banks, student loans, auto manufacturing, health care, energy and Fed money printing. It really boils down to this:
- Romney equals Recovery
- Obama equals a Second Great Depression
PhilTheCapitalistPig| 9.26.12 @ 9:16AM
I always look forward to Peter's writing. Surely one of the most articulate and knowledgable conservatives on our side. This piece is masterful.
sickofit5| 9.26.12 @ 10:34AM
This is what I don't understand about the Romney campaign. They allow Obama to rewrite history and accuse him of being more of the same and then demonize Bush. Romney either has to say that he is not more of the same or that the last 30 years are a lot better than the last three. He should also point out many of the similarities between the Bush and Obama spending showing how similar they are. Romney is allowing Obama to define the past and who he is, wife killer, tax cheat and job exporter without using the multitude of examples that show that Obama does not know who we are, Americans, and we still don't know who he is.
Stkman| 9.26.12 @ 2:24PM
Romney is not allowing Obama to rewrite anything. The MSM is allowing it.
JD| 9.26.12 @ 10:42AM
Ferrara captures the cause of the housing bust well. It wasn't particularly legislation that did it, though. Regulators were able to push their "help the poor get houses" agenda even in the absence of legislation.
This is the Great Depression all over again. First, bad monetary policy combined with bad regulations cause a crash. Next, a weak president (Hoover/Bush) who's not nominally liberal nevertheless tries to buy our way out with government intervention. Then he's replaced by a new guy (FDR/Obama) who promises to be the anti-first guy is elected, and simply doubles down on what his predecessor did wrong, using the crisis to transform America into a more liberal state. This deeply widens and prolongs the recession into depression.
We can only hope that the final step doesn't come to pass - economic pain leading to the election of radical leaders who start a global war.
Unfortunately, the Left has been so successful in distorting history to make FDR seem like a hero that they see today's parallels and think that that makes Obama a good thing.
JD| 9.26.12 @ 10:47AM
Obama keeps whining that the Republicans have nothing but the same idea over and over again for the last 30 years, but the fact is that that idea works whenever it's tried, and we suffer because it's been tried less often than not. Why should we come up with a new idea when the existing one works?
Al Adab| 9.26.12 @ 11:51AM
JD:
Good point. The economic expansion which began in 1983 continued unabated ( Clinton bought in after 1994) for 25 years untill the Congessional change in 2006. Since then old tired policies of envy and redistribution (call it whatever) continue to demonstrate their failures. JFK knew, "A rising tide lifts all ships" and used that to promote his tax cuts. Economic expansion and individual well being comes not from redistribution but from economic growth. Why that fact escapes so many is beyond my ken.
Anthony| 9.26.12 @ 11:48AM
Obozo lied.... the ambassador died.
It wan't the video Obama,
it was you boasting bout Osama.
Butch| 9.26.12 @ 4:47PM
Pretty darn accurate, Mr. Ferrara. Some of us do remember the 70s, with Carter's "20-20" economy, and also remember the 80s through 97. Econ departments in all but the liberal bastions dropped Keynesianism and began teaching supply side and Friedman. Life was good for a long time. Ferrara also nails the source of the original crash: democratic politics in mortgage lending post-06.
But you will never get this through the MSM, and most "independents" will never read this. It would take an advertising genius to compact this message into a 30-second TV spot, even a one-minute spot. The message cries to get out.
Butch| 9.26.12 @ 4:53PM
Started myself thinking: Key statistics (GDP growth, Household wealth growth, Household income growth, unemployment) 1982-2007, then the same statistics for 2008-2012. Then, "It's not the past 30 years that has been the failure, Mr. Obama . . . it's the past four years."
Howard| 9.26.12 @ 11:21PM
I think Keynes is still taught as the mainstay in most liberal arts colleges. I'm not sure he is god like accepted as when I majored in Economics in the early 1970's. But, Keynes still is a standard of most curriculum.
Howard| 9.26.12 @ 11:18PM
Excellent overview of current and prior economic situation. Even today liberal economists pooh pooh Reagan/Volker accomplishments by saying the 1980's were a Keynesian led recovery. This would be owing to deficits during the Reagan years. They are wrong of course, but their minions in the New York Times etc, still pimp for high taxes and heavy handed regulation as the "cure" for economic ailments.
D. Welch| 9.27.12 @ 1:47PM
The case has been made that what fueled the Reagan Thatcher prosperity was cheap energy prices made possible by the Alaskan and North Sea oil fields that smashed OPEC's high prices. Inexpensive energy also fueled the economic prosperity of the 1990's as well.
D. Welch| 9.27.12 @ 1:42PM
This article has a historical quality to it, and really doesn't address our current predicament. The underlying cause of our current difficulties is high energy prices. As economist James Hamilton has pointed out nine out of ten past recessions have been caused by a spike in oil prices. Coupled with the financial crisis in 2008 this has been devastating. High fossil fuel prices choke off economic growth. While finding new sources of oil is somewhat encouraging , there is also a problem. These new sources require that a $90 a barrel price to be profitable--a level that stalls the economy. We are in uncharted territory where neither Keynesian or supply side strategies will work. A sustained period of economic growth may not be possible for a good long time.
Both of our political parties are failing us miserably on telling us the truth about this. To me the real tragedy of this campaign is that the central issue of our time is not being addressed. According the the Hirsch Report and the more recent military report we are on borrowed time. It is time to stop fighting the tired old economic battles of the twentieth century, and seriously consider how to move ahead. People who are interested in learning more may want to read Jeff Rubin's new book, THE END OF GROWTH.