Quit Blaming Bush

"Now Gov. Romney believes that with even bigger tax cuts for the wealthy, and fewer regulations on Wall Street, all of us will prosper. In other words, he'd double down on the same trickle-down policies that led to the crisis in the first place." -- President Obama in an ad released Sept. 27.

This is Obama's core message. In one way or another, he says it all the time. It's his kicker on the stump. You cannot watch an interview with the president or one of his subalterns without hearing it.

And yet, I don't think I've ever heard a TV interviewer, host or pundit ask, "What are you talking about?"

Finally, the Washington Post's "fact-checker," Glenn Kessler, (not exactly a darling of the political right) tackled it recently. He found that it's a lie, giving it three "Pinocchios" out of four. He also found that the Obama campaign has virtually no citations to back up the claim. The supporting material for the ad quoted above cites a single column by the Post's liberal blogger, Ezra Klein, who told Kessler: "I am absolutely not saying the Bush tax cuts led to the financial crisis. To my knowledge, there's no evidence of that."

Klein is right. So is Kessler. "It is time for the Obama campaign to retire this talking point," Kessler concluded, "no matter how much it seems to resonate with voters." He would have given it the full four Pinocchios save for the fact that Obama occasionally throws in "deregulation" along with "tax cuts" as part of the explanation. In its defense, the Obama camp says it means all of Bush's policies, not just the tax cuts it harps on almost exclusively -- never mind that even Obama admits Bush issued more regulations than he did.

The question of what caused the crisis is obviously still controversial (though, Kessler notes, the official inquiry makes no mention of Bush's tax cuts). But a consensus seems to be forming around the following narrative: The federal government, out of an abundance of concern for the plight of the poor and middle class, made it too easy to buy a home. Congress, on a bipartisan basis, set unrealistic affordable-housing goals for Fannie Mae and Freddie Mac. President Clinton used those goals to expand access to mortgages to low-income borrowers. Then President George W. Bush, with the approval of Congress, expanded the practice, until way too many low-income or otherwise underqualified Americans owned mortgages they couldn't afford.

A mixture of greed, idealism, cynicism and stupidity led to the practice of bundling those iffy mortgages into financial instruments that Wall Street didn't know how to handle and regulators didn't know how to regulate. As Rep. Barney Frank (D-Mass.) put it in 2003, he wanted to "to roll the dice a bit" on regulating subprime mortgages.

When the Washington-abetted housing boom went bust, regulators demanded immediate markdowns of mortgage-backed securities, which required financial institutions to sell them, creating a fire-sale atmosphere that fueled the panic even more. The Federal Reserve responded by letting money tighten in a way it hadn't since the 1930s.

Some Obama defenders will say that Bush's deficits made it harder to deal with the crisis. That seems reasonable, even if it's a red herring in the debate about what caused the crisis. And Obama's record on deficits hardly gives him much standing.

I once thought that Obama's relentless Bush-blaming was simply a mix of political expediency and gracelessness. But the truth is more complicated. Liberals have smartly, albeit cynically, laid the case that Bush was Herbert Hoover in order to make the claim that Obama is Franklin D. Roosevelt. For this to work, Hoover must be remembered as a do-nothing free-market guy. But Hoover was no such thing. He nearly tripled government spending in response to the Depression. FDR used Hoover's spending as a baseline for his own, even as he dishonestly decried Hoover's passivity.

Obama has done largely the same thing. The first bailouts of the crisis were supported by Obama but launched by Bush. The same goes for the first stimulus. Obama simply tripled down on all that while claiming he was breaking with Bush.

Or maybe I have that all wrong. Maybe we could get some clarity by asking the president, "What are you talking about?"

This is exactly right.

The financial crisis was caused by the collapse of the subprime mortgage market: they were the underlying securities that caused the large banks to be insolvent. Subprime mortgages were those mortgages given to people at levels beyond their ability to pay. Interestingly enough, it applied to the poor and upper middle class alike. That is why there are so many of these “McMansions”.

The reason for the subprime mortgages was that banks were forced to provide these loans by the Community Reinvestment Act, which was initially passed under Carter and expanded under Clinton. The problem was amplified by Fannie and Freddie, who purchased these loans. The banks did not want to make them, because they correctly realized that they represented a risk. So, Fannie and Freddie bought them up, repackaged them, and sold them to the investment banks. The problem was further amplified by the Fed, which provided the liquidity to fund these mortgage loans directly, particularly with very low interest rates. Indeed, all of the QE3 monetary expansion is through the purchase of mortgage securities. These programs made the subprime mortgate market HUGE.

The problem was further amplified by the use of derivatives by the large banks, which used the mortgages as the underlying security. The derivative market is measured in the 100s of TRILLIONS, largely by having multiple dependencies on the same underlying (mortgate) securities. The crisis was amplified further by the repeal of Glass-Steagle (sp?), which allowed the merger of the commercial banks with the investment banks, creating the “too big to fail” banks. Glass-Steagle was repealed under Clinton too.

The ineluctable conclusion is that the financial collapse, which then lead to the recession, had nothing to do with tax policy, of Bush or anyone else. It had nothing to do with fiscal policy, of Bush or anyone else. It had nothing to do with GENERAL regulation policy (except Glass-Steagle), of Bush or anyone else. Indeed, Bush made attempts to get Congress to regulate Fannie and Freddie for precisely this reason; they saw the problem coming simply because of the sheer magnitude of the problem. However, they were opposed by the democrats who wanted the continued financing of home ownership for poor people. It was also the democrates that repealed Glass-Steagle and also passed the Community Reinvestment Act.

I am truly frustrated that this meme that the recession was caused by Bush is continually pushed AND IS NOT COUNTERED BY THE ROMNEY CAMPAIGN. (I am no fan of Bush, but it is still nonsense).

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