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When people seek to exploit economic, social, or other ills for purely political purposes the result is inevitably a skewed, oversimplified analysis of the problem, its causes and potential solutions. Such was the case with a recent column that contemptuously mocked the efforts of conservatives – republicans, democrats, and independents alike – to stem the rapidly rising tide of government intervention, control and spending.
Despite implications to the contrary, it was quite literally a perfect storm of irresponsible and at times flatly stupid behavior on the part of republicans, democrats, regulators, individuals, and business leaders alike that led to the current recession and the near freezing of the financial and credit markets last fall. While a thorough treatment of those issues is beyond the scope of this column, a brief synopsis of the underlying causes of our present economic mess is warranted.
To begin, in the mid-late 1990s republicans in Congress, with the full blessing of Federal Reserve Chairman Alan Greenspan, began to push deregulation of the financial industry beyond the limits of reason. It is not, it must be noted, antithetical to believe in “smaller government”, while at the same time maintaining a firm belief that government has a vital role to play in society generally and business specifically. A notable result of these efforts was the repeal of a portion of the depression era Glass-Steagall Act in 1999. The purpose of the repeal, which was signed into law by then President Bill Clinton, was to remove many of the barriers between depository banks and investment banks.
The effect was simple: many traditional banks suddenly had the opportunity to expose themselves to risks previously only associated with investment banks. The result, as we saw in 2008, proved to be catastrophic. Banks, or divisions thereof, whose primary purpose was to serve Main Street rather than Wall Street failed, putting depositors’ money at risk, and creating a ripple effect which affected a large swath of the economy far beyond the confines of Manhattan.
Meanwhile, others in congress, led by New England liberals like Barney Frank and Chris Dodd were advancing legislation that virtually forced banks and institutions such as Fannie Mae and Freddie Mac to make loans to individuals who lacked the credit or financial means necessary to repay those loans. Many banks willingly complied, disregarded all notions of responsible lending practices and started churning out loans without verifying income, credit, or financial stability. Individuals complied by irresponsibly taking out loans equal to or even exceeding the value of the homes, paying interest only, making little or no down payments, and by generally using their home as an ATM. Banks and borrowers operated under the shared assumption that home values always rise.
All of this led to an explosion in the number of sub-prime mortgages and the size of the sub-prime mortgage market. As these loans were packaged, securitized, and sold to investors the toxicity of these assets spread to all sectors of the economy like a virus – a virus that lay dormant until the conditions became right. When the housing market bubble burst, as all bubbles eventually do, the virus immerged with devastating effect.
Further compounding the problem was the development of new derivatives such the now, infamous credit default swap. These instruments were neither pure securities nor pure insurance. As a result, they went unregulated by everyone. They were marketed as safe investments, when they were anything but, and were bought by investors who often lacked even a basic understanding of how they worked. Again, the effect was the same, to exponentially multiple the danger of the bad loans and to further spread them throughout the system.
Exacerbating all of the above were at least two other culprits – the Federal Reserve which kept interest rates artificially low, thereby increasing the demand for loans, and the credit rating agencies who recklessly slapped their highest ratings on securities backed by these loans. Together, the Fed increased the supply of the loans while the rating agencies lolled investors into an increasingly false sense of security.
While there were other factors at play, the above represents the primary drivers which led us to where we are. Contrary to the assertions of some, George W. Bush had very little to do with the current economic downturn. And, while it’s true he inherited a budget surplus, he also inherited a recession which virtually coincided with his taking office. Further, he was faced with the lingering effect of the dot com bust, which left the NASDAQ at less than half of its pre-bust level, and then there was 9/11.
In fact, the real problem with Bush was that, with exception of tax cuts, he was a fiscal liberal. He spent with abandon and completely ignored the resulting impact on the deficit and national debt. Then, last fall Bush, Henry Paulson, and other members of the administration took the unprecedented and appalling step of nationalizing a large segment of our financial system.
To be perfectly clear, Bush threw open wide the door of socialism; a door the current administration was more than happy to come rushing through – all of which brings us to where we are today. President Obama’s spending policies, his takeover of the auto industry, and his efforts at taking over the healthcare and energy industries are radically transforming the fabric of our society and are in direct opposition to the principals upon which this country was founded.
In sum, this not a republican issue, this is not a democrat issue. This an American issue. This is a battle between conservative ideals and liberal ideals; between capitalism and socialism and no amount of mockery by the liberal elite can change that. Anyone who is concerned about the direction of this country and who has the fortitude to take a stand, even when it means speaking out against one’s one party, is welcome.
(Pete Whaley is an attorney in Williamstown.)