The Monday column from Clark Judge:
SOTU’s Biggest Misstatement – How We Got in This Economic Mess, and How We Get Out
By Clark S. Judge: Managing Director, White House Writers Group, Inc.; chairman, Pacific Research Institute
Let’s call it a misstatement.
Among the most complete – and consequential – misstatements in President Obama’s State of the Union Address was that the financial crisis and current Great Recession were products of Reagan era policies. Democrats and their media friends presented this conclusion as a given. But it is wrong and not calling them on it opens the door for making our economic troubles much worse.
Not that Reagan era policies have been followed to the “T” since the 40th president left office.
The Reagan policy package was simple: lower tax rates, cuts in domestic discretionary spending, putting entitlements (Social Security was the only problematic one in the 1980s) on a self-sustaining footing for the next quarter century, broadly reduced regulation (in fairness, started under Carter), and more free and open trade.
Since Mr. Reagan left office we have seen the number of tax rates proliferate and the marginal rate rise well above where it was on Inauguration Day 1989. Domestic discretionary spending has risen alarmingly. No attention has been given to the financial sustainability of entitlements, even as a crisis in funding gathers that dwarfs anything the national government has ever faced. Regulations have proliferated throughout the economy, including environmental and product regulation as well as in Sarbaynes-Oxley before Mr. Obama took offices and even more at EPA as well as in Obamacare and Dodd-Frank since. The push for more open global trade has stalled and even reversed.
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In other words, the last twenty-three years have been a time – broadly – of backtracking from, not advancing Reagan’s policies. This is particularly true of those that actually caused the financial crisis.
We can debate the rationale and wisdom of Alan Greenspan’s low interest rates for much of his time as chairman of the Federal Reserve Board. But those rates clearly created the pool of liquidity that fueled bubbles – first in dot-com, then in residential real estate. And it is hard to imagine the real estate bubble getting as catastrophically massive as it did without Barney Frank and Congressional Democrats famously ignoring warnings from the George W. Bush administration and insisting that the government “roll the dice” on Fannie Mae and Freddie Mac.
For quotes, see: http://online.wsj.com/article/SB122290574391296381.html
In calling for more regulation in his address to Congress last Tuesday, the president incorrectly said that no one had warned of the housing bubble and its collapse. The Bush administration did. The Administration’s sin here was not ignorance of the rising crisis and it was not failure to offer solutions. It was lacking the urgency and courage to fight harder for reform.
Nor was Wall Street perfidy to blame for what happened. The trouble with Wall Street was myopia, and among sins, sloth. The financial markets blindly followed the logic of easy money and guaranteed places to invest, failing to see ahead to the cliff toward which they sped.
It is a clich now to compare the present downturn to the Great Depression – and among Democrats to see the last few years as an FDResque response to the crisis. But this downturn, from which we are far from emerging, is not a Rooseveltian moment but a Jacksonian one. The crisis is not the 1930s all over, but the 1830s.
In the 1830s, the national government under President Andrew Jackson embarked on a policy of radically looser money and preference for investment in the equivalent of residential (and commercial) real estate at the time, frontier federal land.
As Jackson wound down the Bank of the United States, in his mind an instrument of what we would call now Bain Capital-like Eastern moneyed interests, he moved federal deposits to regional banks of his choosing, “pet” banks in the term of the day, not unlike how the current administration favors its friends – Solyndra, Soros and for example.
At the time banks issued notes on their federal deposits, creating the bulk of the money in circulation. The “pet” banks were more expansive in issuing note than the Bank of the United States had been, so money creation exploded.
In this period, the federal government was getting a substantial share of its revenues from selling its Western lands. According to historian John Steele Gordon: “”People who had no intention of settling [on a property] bought large tracts of land from the federal government and paid for them with the paper money borrowed from local banks in even greater amounts. Land sales by the federal government, handled through the government’s General Land Office, had amounted to $42.5 million in 1832. By 1836 they amounted to nearly $25 million, and in the early summer of that year were running at the astonishing rate of nearly $5 million a month.”
In contemporary terms, the Land Office was Fannie and Freddie and the “pet” banks were the Fed.
Jackson became alarmed at all the speculation and announced that the government would demand payment for Western land in gold and silver. At the same time, he began moving money from the pet banks. The effect was not unlike that of the current administration’s recent demands that banks increase their reserves and raise their credit scores. The longest economic downturn in American history followed.
The problem for us is that buying the president’s story, not the real one, points just where the president is leading: to federal criminalizing of bad investment decisions.
Pity the men and women who made those decisions. They did not understand how much the world they worked in was the temporary stage setting of fickle politicians and would disappear in the middle of the play.
But if the president’s story stands, how can we get ourselves out of this mess? How can we keep from repeating it? And if it leads to prosecutions, who will feel safe about investing in America anytime soon?