I was communicating with a conservative in an online forum and he said: "...common sense and growing numbers of people around the world are basically saying that Obama's policies are throwing gas on the fire. Nobody, no country has ever spent it's way out of debt!" Well, that may be true (Though it seems to me that spending on solid, serious investments would indeed get a country out of debt as a positive side effect of growing the economy) but that's not relevant to the economic crisis that the US finds itself in today. The crisis is more accurately described by Simon Johnson, who used to be the chief economist for the International Monetary Fund and speaks of countries that find themselves needing assistance:
Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.
Just as with the S&L crisis of the mid-1980s to the early 1990s, where 747 Savings & Loans collapsed at the cost to the Federal Government of a little over $160 billion, private investors took increasingly risky gambles with their money in the (justified) confidence that the government would bail them out. The group Wall Street Watch put together a 231 page PDF detailing just why the current crisis occurred. Following are their 12 main reasons:
No, Republicans are not entirely to blame. Yes the roots of the crisis began on Bill Clinton's watch, but note that deregulation is a Republican specialty. Democrats usually prefer more regulation and trust businespeople less than their friends across the aisle do. Does the Republican Party have any idea how to fix the mess? Well currently, they can't even produce a competing budget blueprint. Republican Party leaders claim that the Democrats didn't produce a competing budget in 2005 & 2006. True, but there was no apparent crisis back then, so that criticism is beside the point.
- In 1999, Congress repealed the Glass-Steagall Act, which had prohibited the merger of commercial banking and investment banking.
- Regulatory rules permitted off-balance sheet accounting — tricks that enabled banks to hide their liabilities.
- The Clinton administration blocked the Commodity Futures Trading Commission from regulating financial derivatives — which became the basis for massive speculation.
- Congress in 2000 prohibited regulation of financial derivatives when it passed the Commodity Futures Modernization Act.
- The Securities and Exchange Commission in 2004 adopted a voluntary regulation scheme for investment banks that enabled them to incur much higher levels of debt.
- Rules adopted by global regulators at the behest of the financial industry would enable commercial banks to determine their own capital reserve requirements, based on their internal “risk-assessment models.”
- Federal regulators refused to block widespread predatory lending practices earlier in this decade, failing to either issue appropriate regulations or even enforce existing ones.
- Federal bank regulators claimed the power to supersede state consumer protection laws that could have diminished predatory lending and other abusive practices.
- Federal rules prevent victims of abusive loans from suing firms that bought their loans from the banks that issued the original loan.
- Fannie Mae and Freddie Mac expanded beyond their traditional scope of business and entered the subprime market, ultimately costing taxpayers hundreds of billions of dollars.
- The abandonment of antitrust and related regulatory principles enabled the creation of too-big-to-fail megabanks, which engaged in much riskier practices than smaller banks.
- Beset by conflicts of interest, private credit rating companies incorrectly assessed the quality of mortgage-backed securities; a 2006 law handcuffed the SEC from properly regulating the firms.
Does the Obama Administration appear to have things under control? Paul Krugman looks at the plans to spend multiple hundreds of billions of dollars and how it will impact "Mr. Obama’s promise that his plan will create or save 3.5 million jobs by the end of 2010." Krugman states: "It’s a credible promise — his economists used solidly mainstream estimates of the impacts of tax and spending policies." Krugman's worry is just that the stimulus is too small, that Obama doesn't plan to spend enough to offset the jobs that have already been lost. So there are certainly problems, but it appears that our government is at least headed in the right direction.
The economist Dean Baker agrees that the stimulus plan is a good one, but that a third stimulus is needed. Baker is the fellow whose constant refrain, whenever the traditional media touts a "mainstream" economist, is to point out that the particular economist "Didn't see an $8 trillion housing bubble developing (And in many cases, they still haven't acknowledged that the bubble ever existed in the first place)!" Baker adds (PDF) that the insistence of many Administration economists that they encourage the payment of bubble-inflated prices for housing continues to complicate the picture.
The problem with American auto companies is also quite serious, but various bloggers seem pretty happy about the Administration's response. Yes, the Administration is being tougher on the auto companies than on the bankers and financial companies, but there doesn't appear to have been much choice in the matter.
The one really sour, disappointing, hugely frustrating part of the picture has been the response of the traditional media. Relentlessly concerned with trivia, focused on personalities and not upon policy, the media seems determined to not finger the last Administration as being in any way responsible for anything.
The media's refusal to involve the Bush administration in any of a wide array of stories about the economy deprives their consumers of the very analysis of policies that would help them understand and evaluate proposals to address the crisis.
If you don't know where you came from, how are you supposed to know where you're going?
UFPJ-DVN's economics blog