What Really Caused Our Current Economic Problems

Posted By Elgin Hushbeck

For quite some time a major argument of the Democrats has been to blame Bush for our current situation.  Now this is being expanded to claim that to elect Romney and Ryan would be a return to same policies that got us into this problem in the first place.  While a common line from the left, as I detailed in my book Preserving Democracy, this ignores what actually happened.

In short (and see my book for the details) the financial crisis in 2008 was brought about by 4 factors.  1) The housing bubble which was caused by government housing policy going back to the late 70s  and that punished banks that did not loosen their lending practices to make the riskier loans demanded by the government.   2) New financial instruments developed to satisfy the government’s push for looser home loan practices.   Leading the way in this area were Fannie Mae and Freddy Mac.  These instruments were then put into the market with the vague backing of the federal government, and once accepted became the norm and were soon used by others.  3)  These first two caused the housing bubble and as the bubble grew it produced the typical loose standards and excesses common to all finical bubbles.   All three things came to a head in 2007 as the bubble began to burst. 

While you would never know it from the media, it is just a fact that Bush and the Republicans repeatedly tried to fix these growing problems, but they were blocked by Democrats, who instead attacked the the regulators trying to point out the problems  and accused Republicans of trying to deny housing to the poor. The last major effort to avoid this crisis was in 2005.

Once the Democrats won control of the Congress in 2006, any hope of averting growing problem was gone. So while the claims that this was all Bush’s fault may play well with President Obama’s supporters, they don’t quite line up with the facts of what actually happened.  Still with all that, as the bubble burst the indications were that the recession that followed would be a mild one, and it very well may have been, except for the last item.

4) Late in 2007 the government accounting board mandated a change in the accounting rules imposing mark to market accounting.  It was this change in the rules that took what looked to be a mild recession and turned it into a major fiscal crisis.  Again for the details see my book, but this is why TARP and the various stimulus bills did not work, for they did not address the actual problem.  By the time the problem was realized and the rule repealed in April 2009, the damage had been done.

Thus it is simply false to claim that Romney and Ryan would be a return to the policies that caused our current problems. While Bush is by no means completely blameless, after all his administration came up with the initial response of bailouts and TARP, he at least tried to address the root causes of the housing bubble, which was behind the recession.  Still, I do not believe either party was really behind the Mark to Market rule which caused the worse problems.   Frankly this may be one of the reasons its role is frequently overlooked, as there is no political advantage in pointing to Mark to Market, since neither side can really blame the other side for this.

Aug 19th, 2012

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