Political Hay

Inheritance

When Mr. Obama points blame at his predecessor he is pointing in the wrong direction.

By 8.1.12

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Clever politicians are good at articulating facts that, while accurate, are misleading. The President and his surrogates have taken this art to a new level as they seek to undercut Mitt Romney's claim to be most capable of tackling our struggling economy. In a recent economic address, the president suggested the failure of the Bush presidency, and by implication a Romney Presidency, by saying: "from 2001-2008, we had the slowest job growth in half a century."

The president was technically correct. Arithmetically, any analysis of economic activity comparing the first day of the Bush presidency to the last will produce an anemic trajectory. For example, on his inauguration day, total U.S. non-farm employment stood at 133 million, and eight years later it was 134 million -- apparent stagnation.

These figures appear to discredit Bush's economic policies, but the calculation cited by the president is meaningless in determining the efficacy of these policies because the time period he observes captures outcomes for which Bush should not be held accountable.

Consider the years 2001-2003. Virtually every economist pegs early 2001 as the beginning of the U.S. recession that followed the burst Internet bubble -- mere days after Bush took office. A recovery was stifled later that year by the attacks of September 11th that caused many sectors of the economy virtually to stop, such as airline travel and resort activity. Nine months later, in the summer of 2002, the economy was hurt once again by the ripple effect of the fraud and bankruptcies of World Com and Enron.

The impact of these three events was profound and extended into mid-2003. For the period from the beginning of Bush's tenure to mid-2003, employment fell by almost 4 million. Unemployment rose to over 6%. Equity markets shed $4 trillion of value, the equivalent of the entire U.S. corporate pension savings. In June/July 2002 alone, the S&P shed almost 20% of its value -- the equivalent of the 1987 market crash.

Only the most partisan would suggest the administration bore responsibility for this bleak picture, Bush's inheritance if you will.

The analysis of the Bush presidency looks different when the time-frame considered is most relevant to Bush's core policies. For example, the key policy response to the events of his early years was the Jobs and Growth Reconciliation Act of May 2003 containing the now famous Bush tax cuts. Following that legislation, for the period June 2003 through January 2008, nonfarm employment increased by almost 10 million. Unemployment fell from 6.3% to 5%. GDP grew by $3 trillion. Tax receipts to the U.S. Treasury grew every year and were the largest in recorded history, and notably in the context of lower marginal rates.

Now consider 2008, the last year of his presidency where there was, again, significant economic dislocation when the housing bubble burst and significant job loss. Who bears that responsibility? With Fannie Mae and Freddie Mac at the heart of the crisis, Bush deserves a pass.

It is well documented that a defining initiative of the Bush administration was to seek the reform and potential dismantling of Fannie Mae and Freddie Mac (GSEs) because of the risks they presented to the economy, and for their roles in distorting properly functioning mortgage markets that led ultimately to the crisis. The administration was relentless in its effort to reform these agencies and should not be held to blame for their contributions to the crisis.

How central to the crisis were the GSEs? The roots of housing bubble can be traced, in large part, to 1992 when the GSE Act imposed "Affordable Housing" goals on the agencies via quotas which required them to purchase loans from low- to middle income home buyers. The quotas were a means by which the Democrats hoped to achieve their social policy goal of higher home ownership among lower-quality borrowers.

Initially the quotas required Fannie and Freddie to allocate 30% of their loan purchases to satisfy this mandate, and by the end of the Clinton Administration it was a breathtaking 50%. It is hard to overstate the correlation between these government-directed quotas and the crisis 15 years later. Prior to the quotas, the demand for lower-quality mortgages by private market capital was limited, and understandably so, because of the risk they presented.

But the quotas changed all that. They distorted the mortgage market first by creating artificial demand for these types of loans and, second, by creating a dynamic where, in order to accommodate such a quality-insensitive buyer, market participants lowered mortgage underwriting standards. These lower standards were ultimately embodied in now-infamous subprime mortgage products and even mainstream mortgages. In the mid-1990s, Fannie and Freddie, in an effort to reach their quotas, reduced mortgage down payment requirements to 3%, and by the end of the Clinton years, they were buying loans with no down payment -- well before Bush came to office.

So, the subprime mortgage market did not emerge organically driven by arm's length demand and price discovery among private market participants. It was a government creation. Tellingly, at the time of the crisis, Fannie and Freddie held 74% of all subprime and riskier loans.

In an odd perversion, Democrat-sponsored Dodd-Frank has imposed itself on all participants in the crisis -- such as bankers, credit rating agencies, derivatives, and big banks -- while ignoring Fannie and Freddie. It is as if the sponsors of that legislation and the Democrat-controlled Congress purposely gave the GSEs a de facto waiver from the new regulatory order in an attempt to exonerate them.

But such irony does not exculpate the GSEs, which even "roll the dice" Barney Frank would describe as more affiliated with the House of Obama than with the House of Bush. Consider that after Chris Dodd, then Senator Obama was the largest recipient of contributions from the GSEs.

And therein lies an inconvenient truth for the president: it was those in Obama's own house that fueled the mess which he often describes as his inheritance.

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About the Author

Emil W. Henry Jr. is CEO of Henry, Tiger, LLC, a private equity firm, and is a former Assistant Secretary of the Treasury.