Tuesday, September 16, 2008

How Did This Economic Mess Happen?


Which Bush Economic Policies Destroyed the Economy?

I ask this question because I truly don't know. Up until the final quarter of 2007 the economy during the Bush years was quite good. Things began to get shaky in 2006 when oil prices and subsequently prices at the pump started pushing ever higher. Still the economy grew, unemployment was low, non-energy inflation was low, interests rates were low, overall poverty remained largely unchanged since the 60's, even the dreaded annual federal deficit was relatively small as a percentage of the overall GDP.

If you take into account the mild recession that followed the tech bubble/bust coupled with the corporate earning and valuation scandals that came to light in the first year of the Bush Administration - all of which was inherited - and, of course, 9/11 and the subsequent wars it is amazing the economy did as well as it did.

So what went wrong?

Were there fundamental flaws in policy or a confluence of events that skewered a seemingly robust economy? Maybe both? If we then add such long-term problems as inadequate investment in economic and physical infrastructure, rapidly rising medical and pension costs of an aging population, sizable trade and federal deficits, and stagnation of family income particularly in the lower economic groups, you can see that these problems have caused a marked reduction in the value and status of the dollar worldwide. How we got to this place pales in comparison to where we are headed, but I digress.

Oil

Certainly the oil situation predates President Bush by decades. The Bush Administration did put forth a comprehensive energy plan that included increasing American produced oil supplies among other proactive things, but it never made it through congress and nothing was done. Whether it would have forestalled the situation we are in is up for debate.

When major oil producers in Venezuela, Russia and Nigeria nationalized their oil businesses it signaled a looming hostile environment for oil supply/price stability. China, India and other emerging southeast Asian economies ramped up demand for petroleum the price pressure increased. Speculators also had a significant role in the run-up of crude oil prices. The prime factor though was a weakening U.S. dollar.

Did the Bush Administration pursue a weak dollar strategy?

The dollar is weak primarily because the U.S. runs such huge trade and budget deficits. The U.S. government borrows nearly $2 billion a day abroad. Many foreign investors have become unwilling to lend us that much money at current low interest rates. This leaves it to central banks to make up the difference. In 2004, fully 49% of the U.S. current account deficit was financed by foreign central banks, with China and Japan the biggest lenders. High Federal deficits can be squarely laid at the feet of the Bush Administration.

Japan and China buy dollars to keep their currencies undervalued and, of course, their products underpriced. This dysfunctional co-dependency creates a terrible cycle. Cheaper Asian currencies and exports aggravate the trade imbalance even further - leading to still more borrowing. A high valued dollar suppresses American exports. So, one could ask, wouldn't pursuing a weak dollar policy help the situation? Apparently not.

What about the Federal Reserve? Keeping interest rates too low has hurt more than it has helped. Since I don't know that much about high finance I can only comment on the effects and not on the theory of such a strategy. If using interest rates to control inflation is the goal then the Fed has failed. Low interest rates hurt the value of the dollar. It dilutes the value of any savings individuals might have. It makes foreign investment in U.S. backed bonds less attractive as described earlier.

The Mortgage Mess

Ridiculously low mortgage rates have caused a huge problem. I am wary of throwing this mess solely on the Bush Administration other than to ask who the hell was minding the store? Certainly the changes in the Community Reinvestment Act during the Clinton Administration that put pressure on lenders to loosen their time tested lending practices was the crack in the dike. Changes in the late 90's to regulatory rules blew the crack wide open. It was a bipartisan fiasco. As part of a decades-long anti-regulatory crusade Sen. Phil Gramm (R) Texas, pulled a crafty legislative maneuver called the Commodity Futures Modernization Act that paved the way to this current multibillion-dollar subprime meltdown. Signed by President Clinton as part of a larger bill it allowed regulatory agencies to cast a blind eye on banks and hedge funds that were gambling on whether an investment (for instance, a batch of subprime mortgages bundled into a security) would payoff or fail. Because of certain provisions of Gramm's bill (which were supported by Fed chairman Alan Greenspan and Clinton's Treasury secretary Larry Summers) a $62 trillion market was essentially unregulated. There was no one to make sure the banks and hedge funds had the assets to cover the losses they were guaranteeing.

Again, I'm not sure Bush policies were even partly responsible, but by God wasn't anyone awake at the switch? When the market was saturated with overbuilt McMansions and the first of the foreclosures began pushing home values down the whole thing - relying on ever increasing home prices - crashed and burned.

Fannie and Freddie, IndyMac, Bear and Sterns, Lehman Brothers, Countrywide, Merril Lynch to name a few have been mismanged into financial collapse. Strangley, we learn the high elected officials have their mits all over these entities by either receiving campaign contributions or sweetheart deals on personal loans and mortgages. Again - a very bipartisan group this bunch.

In conclusion I can't say it was purely Bush Administration policies, congressional inaction or a confluence of events that destroyed the economy of a good nation (and maybe the world) but, it was on his watch. I wonder if McCain can actually change anything that goes on in the Capitol or even in the White House, but I'm damn sure that Obama's "raise taxes" plan is not the answer.

What a mess...



CW

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