Can We Blame the Recession on President Bush?

Generally I think he wasn’t a very good president. And while there were a wide, wide range of factors that brought us to this recession, not many of them can be blamed on Bush II. A slightly better argument can be made that he should have seen some of the problems coming, but failed to foresee them and do anything about them. So where do we place the blame?

(Biggest problems first)

1. The Housing/Real Estate Bust
The blame for this problem lies squarely on the shoulders of the Republicans, the Democrats, Wall Street, Main Street, you and me.
A. The Republicans – During the early 80’s they went on a de-regulation rampage. Constraints came off several aspects of the market, but probably the two biggest problems flowed from the newly created mortgage bond market and the creation of the home equity loan. Prior to the 80’s, a mortgage was between yourself and your local banker, with you borrowing funds that your neighbors had put into their savings accounts. Following the change in finance laws, bankers could minimize risk to their bank by selling your mortgage to Wall Street where it could be bundled with other people’s mortgages, split into trances and sold like a commodity on the bond market. Loan officers at the local bank lost some of their incentive to make certain that you could repay. Once the mortgage was sold, it was harder for anyone to keep track of the risk of default. With the coming of the Home Equity Loan in the mid 80’s, homeowners now had the privilege of sucking the equity out of their one good asset. With this money they consumed, consumed, consumed and in turn, lifted up the economy.
B. The Democrats – In the late 90’s, with all of their good intentions, they believed that if lower income folks owned a home, they would make better choices and have a more stable, productive lives. But when this was paired with the incredibly loose credit we had after 2000, they became not only homeowners, but also speculators in the expanding real estate market. The loose regulations at Fannie Mae and Freddie Mac were where things really opened up the flow of money. The price of homes will never go down … right?
C. Wall Street – The single biggest problem, as the boom was in full stride, came when the bond traders pulled together big piles of these risky mortgages, and sent them over to their friends at Moodys and Standard and Poors rating services. Because the rating services were paid by the brokers, the analysts didn’t ask a lot of questions, and stamped them as AAA rated. Many trillions of dollars worth of these bundles were sold around the world to people and institutions who intended to be low risk investors such as pension funds. (As you may have heard, this real estate bubble happened in many parts of the world.)
D. Main Street – Contractors, real estate agents, developers, bankers, independent mortgage brokers all jumped into the housing frenzy. Lots and lots of people in your community made serious money during this boom, never realizing that it was adding to the problem.
E. You and me – We bought, financed and refinanced houses, cars and a multitude of toys. I swear I got 20 credit card solicitations every week during that period of time. It was just too easy to live on credit. When the cards got a little over extended, we just drew some more equity out of our houses.

2. In 2008 as things were starting to go bust, the financial markets came REALLY close to stepping over the edge … and have been nervous ever since.
A. Few of us have a clue about how frightened the Bush administration, Ben Bernanke, the Federal Reserve and Wall Street were during the fall of 2008, when the world financial markets almost went into a death spiral. During one meeting with the president, the CEOs of the 8 largest banks in the U.S. were virtually ordered to accept $350 billion dollars in loans from the government so that the financial markets could regain some confidence in the liquidity of credit. (It was later announced that the dollar amount may have totaled a couple of trillion or more.) At that point, no one had any idea how far the roots of the wholly unregulated mortgage derivatives market made trillions of dollars disappear virtually over night. (That’s trillions with a T!) Nobody has really liked the idea of bailing out the darn banks and Wall Street firms that played such a big part in getting us into this mess, but had they not, it would have hit every single one of us …. HARD.
B. With such a massive loss in real estate equity (estimates were in the neighborhood of $13 trillion … just in the U.S.) and general loss of confidence in borrowing, the credit markets are still nervous about borrowing. They used to give away credit cards with high credit limits like candy. Not so any more. Go to you local bank to ask about a small business loan … good luck. Since 2008, most folks have been working a little harder at paying down their credit cards and loans. While this is good for their own family’s financial stability, it also means that they are not going out and spending it on the consumer items that serve to boost the economy.
3. Lastly, right as all of this was hitting us full force, we saw a dramatic rise in oil prices. You may recall that the summer of 2008 saw gas prices hit $4.00 per gallon. At the time, some less than half of our crude oil was produced domestically, so an estimated $700 billion dollars of our money was shipped outside of our borders. (Remember, Obama’s Economic Stimulus had to spend ~$400 billion that next fiscal year just to pull us out of the downward spiral. That was a lot of stimulus money, but not enough to pull us into a full-blown recovery.) In a normal economic year, that kind of trade deficit would have provided a period of drag on the economy. But with so many other things going into the toilet, it sent us reeling all the more. Thankfully, decreased demand for crude oil, higher efficiency vehicles, together with lower oil prices and more domestic oil production have backed us away from this problem. But I would not say that this could never happen again.

So can we blame Mr. Bush? There are a few pieces of this that he caused … but very few. If he would have had a crystal ball to foresee the future, he might have been able to minimize more of the problems, but I’m guessing he would have had to go toe-to-toe with more that a few of his own Republican Party to rein in the problems.

Mr. Obama has done some things right. But a president simply doesn’t have nearly as much power to pull different strings to tweak the economy as many people think he does. We are in a tough spot. Our economy has simply changed in a lot of ways over the course of the past 40 years, and we will never simply go back to the way it was. But there are still some scenarios that will pave the way for some kind of recovery … slowly. (I just hope Europe doesn’t go to heck … and drag us down with it.)

Just a thought … DonC

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