This column by ACRU General Counsel and Senior Fellow for the Carleson Center for Public Policy (CCPP) Peter Ferrara was published November 8, 2012 on The American Spectator website.
The American people lost literally trillions in the financial crisis, in home values, in stock values, and in lost jobs and wages. Obama had a narrative as to what caused the financial crisis. It was Bush’s, and maybe even Reagan’s, tax cuts, and Republican deregulation. And the argument that won the election for Obama in my opinion was that Romney just wanted to go back to the same policies that caused the financial crisis (the mess we are in) in the first place.
Of course, that argument makes no economic sense at all. There is no economic theory under which tax cuts cause recessions. Even under Keynesian economics tax cuts are expansionary, not recessionary. Even Karl Marx never said that cuts in tax rates, like Bush and Reagan enacted, cause economic contractions. Just the opposite, cuts in tax rates increase the incentives for increased production and economic growth, by enabling producers to keep a higher percentage of what they produce.
Moreover, the deregulation Obama and his minions blame for the financial crisis, the bipartisan repeal of the old, New Deal era Glass-Steagall Act, actually helped ease the crisis, by enabling commercial banks, or actually their parent holding companies, to buy out failing investment banks, such as when JPMorgan Chase bought the failing Bear Stearns.
The business of commercial banks involves taking consumer and business deposits and making consumer and business loans. The business of investment banks involves issuing and dealing in securities such as stocks and bonds. But the financial crisis did not involve commercial banks failing because they were getting involved in investment banking activities. The crisis involved investment banks getting into trouble with their traditional investment banking activities. And it involved commercial banks and other financial institutions getting into trouble with the traditional banking activity of financing mortgage loans.
But at least Obama had a narrative, and an explanation, as to what caused the financial crisis, and one that worked directly against his opponent and his agenda. The Republicans had no narrative, no explanation, for the cause of the greatest destruction of wealth in world history. Nor did they effectively counter Obama’s narrative. So the millions of Americans angry over their losses, and sustained high unemployment, were left to figure it out for themselves, or to accept Obama’s narrative. Most took the easy way out, and just bought Obama’s line.
But it wasn’t just the Republicans who failed to propagate a full explanation of the financial crisis and its causes. The conservative movement in general failed to adequately engage the public on Obama’s ideologically self-serving financial crisis fairy tale. Sure some individual conservative scholars developed the full real explanation. But the leading conservative foundations and other intellectual outlets never took their case to the American people.
The true causes of the economic crisis were not the pro-growth policies of tax rate cuts or deregulation. They involved first the overregulation of President Clinton’s 1995 National Home Ownership Strategy, which included 100 or more specific regulatory initiatives that together forced financial institutions to abandon their traditional lending standards and create the subprime mortgage market. Those included not only greatly strengthening the Community Reinvestment Act. They included as well racial discrimination suits brought by the Justice Dept. or HUD against mortgage lenders. They also included regulatory mandates on Fannie Mae and Freddie Mac to finance subprime mortgages.
Because the market — correctly as it turned out –perceived the securities issued by Fannie Mae and Freddie Mac as effectively government guaranteed, the market continued lending these government-sponsored enterprises the money to finance new mortgage-backed securities, which are shares in pools of mortgages, especially subprime mortgages. Fannie then sold these toxic financial time bombs throughout the U.S. and world financial communities.
This overinvestment in housing created the housing bubble, bidding up the prices of homes beyond where they could be sustained. When that bubble inevitably popped, the financial time bombs represented by the runaway toxic mortgages all blew the lid off the toxic mortgage securities now spread across the global financial community.
The best explanation of these policies can be found in Paul Sperry’s The Great American Bank Robbery, and Gretchen Morgenson and Joshua Rosner’s Reckless Endangerment.
President Bush’s cheap dollar monetary policies and negative real interest rates further contributed to the housing bubble, providing the dollars and the negligible interest rate incentives for further overinvestment in housing and other long-term construction. When those loose monetary policies had to be stopped to short circuit budding inflation, the housing bubble popped, as the runaway housing prices could no longer be sustained.
The best explanation for this cause is by Stanford Economics Professor John Taylor’s Getting Off Track.
The conservative movement has lost the biting intellectual edge that caused it to intellectually dominate the Reagan era that extended for a generation from 1980 to 2008. The movement needs to focus more on advancing innovative and articulate intellectual leaders.
The Republican Party too needs to turn to intellectual, idealist leaders who know what they believe and why, and how to articulate those beliefs, instead of the multimillionaire business leaders who can finance their own campaigns. Nominate the articulate idealists, who know what they are for and why, and raise money for their intellectual leadership from a broad base.