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The economic crisis – What you don’t hear.

Welcome to VoteFacts.  Today we are looking at the central claim of the Democratic Party that the policies of the Bush administration (and the fiscal conservative theory in general) are the overarching cause of our nation's recent economic crisis.  Here is an example of what President Obama has said on this subject:

"What I won’t do is return to the failed theory of the last 8 years that got us into this fix in the first place."

And there is former Speaker of the House, Nancy Pelosi (D-CA), echoing the presidents sentiment:

"For too long, 8 years this government has followed a right wing ideology of anything goes, no supervision, no discipline, no regulation."

(Videos can be viewed in their entirety by dragging the start button backward)

So, the question to be asked is:  Is it really all Bush's fault, over the 8 years of his tenure, and some sort of "no regulation, no supervision" economic philosophy that he and his fellow fiscal conservatives apparently espouse?  Did the fiscal conservative ideology cause the economic crisis?

First, recall that the last 2 years of the G.W. Bush administration included a congress where both the Senate and the House of Representatives were controlled by Democrats. Further, Speaker  Peolsi and Leader Harry Reid (D-NV) were no shrinking violets when it came to partisan ideology.

From here, let's dig into history a bit in order to get a wider perspective so we can decide whether the Democrats' claim that "the Republicans did it" is political fact versus political fantasy.   This is an incredibly large and complex issue, so you will see links to additional resources at the bottom of this post.  But here we go...

For starters, let's hear what Democrat turned Independent Michael Bloomberg has to say about what caused the economic crisis.

“I would say it all started back when there was a lot of pressure on banks to make loans to everyone. Redlining, if you remember, was the term where banks took whole neighborhoods and said people in these neighborhoods are poor, they’re not gonna be able to pay off their mortgages… and then Congress got involved, and local elected officials as well, and said ‘oh that’s not fair these people should be able to get credit’ and once you started pushing in that direction banks started making more and more loans where the credit of the person buying the house wasn’t as good as you would like.”

We have all heard the frequent argument that the cause of our economic crisis was "deregulation by the Republicans", yet Michael Bloomberg gave us a bit of a start to the possibility of a different narrative.  So let's take an even deeper peek into the dissenting voices of those on the Fiscal Crisis Inquiry Commission (FCIC) who did not agree with the bulk of that finding.  Here are clips of their reasons for dissension (you can read the entire majority and dissenting reports at the Fast Facts section on the home page).

"We reject as too simplistic the hypothesis that too little regulation caused the crisis, as well as its opposite, that too much regulation caused the crisis. This conclusion largely ignores the global nature of the crisis. Large financial firms failed in Iceland, Spain, Germany, and the United Kingdom, among others.

Not all of these firms bet solely on U.S. housing assets, and they operated in different regulatory and supervisory regimes than U.S. commercial and investment banks. In many cases these European systems have stricter regulation than the United States, and still they faced financial firm failures similar to those in the United States. There were housing bubbles in the United Kingdom, Spain, Australia, France and Ireland, some more pronounced than in the United States. Some nations with housing bubbles relied little on American-style mortgage securitization. A good explanation of the U.S. housing bubble should also take into account its parallels in other nations."

"A credit bubble appeared in both the United States and Europe. This tells us that our primary explanation for the credit bubble should focus on factors common to both regions. The Majority's report largely ignores the credit bubble beyond housing. Credit spreads declined not just for housing, but also for other asset classes like commercial real estate. This tells us to look to the credit bubble as an essential cause of the U.S. housing bubble. It also tells us that problems with U.S. housing policy or markets do not by themselves explain the U.S. housing bubble."

"The Commission's statutory mission is "to examine the causes, domestic and global, of the current financial and economic crisis in the United States." By focusing too narrowly on U.S. regulatory policy and supervision, ignoring international parallels, emphasizing only arguments for greater regulation, failing to prioritize the causes, and failing to distinguish sufficiently between causes and effects, the majority's report is unbalanced and leads to incorrect conclusions about what caused the crisis."

"The question I have been most frequently asked about the Financial Crisis Inquiry Commission is why Congress bothered to authorize it at all. Without waiting for the Commission's insights into the causes of the financial crisis, Congress passed and the President signed the Dodd-Frank Act (DFA), far reaching and highly consequential regulatory legislation. Congress and the President acted without seeking to understand the true causes of the wrenching events of 2008, perhaps following the precept of the President's chief of staff - "Never let a good crisis go to waste."

"Like Congress and the Administration, the Commission's majority erred in assuming that it knew the causes of the financial crisis. Instead of pursuing a thorough study, the Commission's majority used its extensive statutory investigative authority to seek only the facts that supported its initial assumptions - that the crisis was caused by "deregulation" or lax regulation, greed and recklessness on Wall Street, predatory lending in the mortgage market, unregulated derivatives and a financial system addicted to excessive risk-taking. The Commission did not seriously investigate any other cause, and did not effectively connect the factors it investigated to the financial crisis."

In March 2010, Edward Pinto, who had served as chief credit officer at Fannie Mae, provided to the Commission staff a 70-page, fully sourced memorandum on the number of subprime and other high risk mortgages in the financial system immediately before the financial crisis. In that memorandum, Pinto recorded that he had found over 25 million such mortgages (his later work showed that there were approximately 27 million). Since there are about 55 million mortgages in the U.S., Pinto's research indicated that, as the financial crisis began, half of all U.S. mortgages were of inferior quality and liable to default when housing prices were no longer rising.

This research raised important questions about the role of government housing policy in promoting the high risk mortgages that played such a key role in both the mortgage meltdown and the financial panic that followed. Any objective investigation of the causes of the financial crisis would have looked carefully at this research, exposed it to the members of the Commission, taken Pinto's testimony, and tested the accuracy of Pinto's research. But the Commission took none of these steps. Pinto's research was never made available to the other members of the FCIC, or even to the commissioners who were members of the subcommittee charged with considering the role of housing policy in the financial crisis.

In the end, the majority's report turned out to be just a story about the financial crisis, rather than a report on what caused the financial crisis. Blaming the crisis on the failure to foresee it is facile and of little value for policymakers, who cannot legislate prescience. The fact that virtually all participants in the financial system failed to foresee this crisis - as they failed to foresee every other crisis - does not tell us anything about why this crisis occurred or what we should do to prevent the next one.  Dissenting Report, Pgs 414-418

So, that warrants a deeper look into those housing and banking regulations.  Let's take a brief jaunt down memory lane...

From Time Magazine, February 1995

"The Clinton Administration proposed sweeping changes in the nation's banking system that would permit commercial banks to sell insurance and underwrite securities.  It would repeal several federal restrictions, including the Depression-era Glass Steagall Act, which forbids banks from underwriting securities or selling insurance. Banks for years have been seeking a repeal of Glass-Steagall. Their efforts were blocked by Rep. John Dingell (D-Mich.), who chaired the House Energy and Commerce Committee until the Republicans took control of Congress last month. A Dingell staffer told TIME Daily that the congressman's top concern is to make sure any reforms include protective "firewalls" to prevent federally insured deposits from being used for risky stock investments.  TIME

Okay, so Clinton made that proposal, but maybe he was bamboozled into repealing Glass-Steagall by the "anything goes", "no regulation", right-wing ideology crowd who held the power in congress?  Well, not according to Bill himself.

Bill Clinton, 2008

"On the Glass-Steagall thing, like I said, if you could demonstrate to me that it was a mistake, I'd be glad to look at the evidence.  But I can't blame [the Republicans]. This wasn't something they forced me into. I really believed that given the level of oversight of banks and their ability to have more patient capital, if you made it possible for [commercial banks] to go into the investment banking business as Continental European investment banks could always do, that it might give us a more stable source of long-term investment."  WSJ

Could Bill be correct that repealing portions of Glass-Steagall was not a mistake?, October 2008

"The truth is... [the repealed portions of the Glass-Steagall Act] had little if anything to do with the current crisis. In fact, economists on both sides of the political spectrum have suggested that the act has probably made the crisis less severe than it might otherwise have been."  FactCheck

Hmmm, maybe Bill gets it right?  But let's keep moving.  What about Bloomberg's claim about government pressure on banks to lend, lend, lend?  And what about Fannie Mae and Freddie Mac?  Let's keep looking.  (Learn more about Fannie and Freddie by clicking here, or visit the Fast Facts section).

From The New York Times, September 30, 1999

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

'From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''   Click here to verify NYT

So, this guy, Peter Wallison, was worried about the repercussions of failure of Fannie Mae way back in 1999?  Then why did those Republicans refuse to listen and properly regulate both Fannie and Freddie?  Well, it looks like they at least tried.

From CNN, June 15, 2002

The (Bush) administration wants legislation to be much tougher in regulating the two federally chartered mortgage financiers than a current bill that sailed through a House committee on a 65-5 vote.

Both the White House and Federal Reserve Chairman Alan Greenspan argue that the two companies, which are involved in financing nearly half of U.S. home mortgages, have too many mortgage-backed securities in their portfolios.

Some members of Congress are reluctant to support any moves seen as hurting the housing market at a time when there is increasing concern about a housing-price bubble.  Partly because of Fannie and Freddie, “we have the strongest, most dynamic housing market in the world,” Sen. Debbie Stabenow, a Michigan Democrat, said at a Senate Banking Committee hearing in April.   Click here to verify CNN

The New York Times, September 11, 2003

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac — which together have issued more than $1.5 trillion in outstanding debt — is broken.

Among the groups denouncing the proposal today were the National Association of Home Builders and Congressional Democrats who fear that tighter regulation of the companies could sharply reduce their commitment to financing low-income and affordable housing.

Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ”The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”    Click here to verify NYT

Almost a decade after Peter Wallison warned of the dangers that the government would have to step in to bailout Fannie Mae...

CNN, September 2008

"Federal officials on Sunday unveiled an extraordinary takeover of Fannie Mae and Freddie Mac, putting the government in charge of the twin mortgage giants and the $5 trillion in home loans they back.

"A failure [of Fannie and Freddie] would affect the ability of Americans to get home loans, auto loans and other consumer credit and business finance," Paulson said at a press conference in Washington. "And a failure would be harmful to economic growth and job creation."  CNN Report

And we have Bill in the video to the right, after the collapse happened.

Bill Clinton

“I think that the responsibility that the Democrats have may rest more in resisting any efforts by Republicans in the Congress or by me when I was president to put some standards and tighten up a little on Fannie Mae and Freddie Mac.”

But in this video to the lower right, Nancy Pelosi  queries about how this crisis could possibly, "sneak up on us, like little cat feet."  

Oh, Nancy, how quickly you have forgotten the warnings.  With that, here is more about the warnings from the past.

CBS Market Watch, November 2003

Gregory Mankiw, chairman of the (Bush) administration’s Council of Economic Advisers said that a small misstep in the risk management programs at Fannie Mae and Freddie Mac could have repercussions for other financial institutions.   Click here to verify CBS

Republican Ron Paul, September 10, 2003:

The boom in housing prices cannot last forever. When housing prices fall, homeowners will experience difficulty as their equity is wiped out. Furthermore, the holders of the mortgage debt will also have a loss. These losses will be greater than they would have otherwise been had government not actively encouraged over-investment in housing."

Republican Peter Schiff, August 2007

“The U.S. economy is on the verge of a massive recession. The worst is yet to come, the fundamentals are not sound, they’re awful. This is going to be an enormous credit crunch. The party is over for the United States. It’s not just subprime, it’s the entire mortgage market.”    From the Daily Show with John Stewart

But perhaps more importantly, to the right is video of a congressional hearing in 2004 regarding a regulatory report on Fannie and Freddie, and below are some quotes from that hearing.

Richard Baker, Republican

"It is indeed a very troubling report, but it is a report of extraordinary importance not only for those who wish to own a home but for the taxpayers of this country who would pay the cost of the clean-up of an enterprise failure.  The analysis made it clear that more resources must be brought to bear to ensure the highest standards of conduct are not only required, but, more importantly they are actually met."

Ed Royce, Republican

“In addition to our important oversight role in this committee, I hope that we will move swiftly to create a new regulatory structure for Fannie Mae, for Freddie Mac, and the federal home loan banks."

Democrat Barney Frank, before the collapse

“…you’re not going to see the collapse that you see when people talk about a bubble…Those of us on our committee in particular will continue to push for home ownership.”

Democrat Barney Frank, after the collapse

“I was very much in disagreement with this push into homeownership…”

More warnings.  Peter Schiff versus Ben Bernanke on the housing bubble, before it happened:

Peter Schiff continued...

“At first it started with Freddie and Fannie. If it wasn’t for Fannie Mae and Freddie Mac, Americans couldn’t have borrowed all this money to buy houses. The only reason they did it was because the US government was co-signing their mortgages.

The government solution is high prices but low mortgage payments subsidized by the government. The free-market solution is low prices. Because if real-estate prices go down, you don’t need to borrow that much money to buy a house. So it doesn’t matter that your mortgage payment is a little higher.

But the government still looks at the problem that home prices are falling. That’s the solution. The problem is that they went up.   Full Report

And from the Congressional Budget Office (CBO)

CBO has long held that the federal government has subsidized the operation of Fannie Mae and Freddie Mac by providing what some have called an “implicit guarantee” of the GSEs’ debt. However, the federal government has never recognized the cost of the subsidy in its budget.    Click here to verify CBO, Page 26

More from Peter Schiff:

And... Not to let "we the people" off the hook., 2008

There’s plenty of blame to go around, and it doesn’t fasten only on one party or even mainly on what Washington did or didn’t do.  As The Economist magazine noted... the problem is one of "layered irresponsibility … with hard-working homeowners and billionaire villains each playing a role." Here’s a partial list of those alleged to be at fault:  The Federal Reserve, Home Buyers, Congress, Real Estate Agents,  The Clinton Administration, Mortgage Brokers, Former Federal Reserve chairman Alan Greenspan, Wall Street Firms, The Bush Administration, an obscure accounting rule, collective delusion.

Finally, there is the discussion about the 2 costly wars and the new Medicare prescription drug plan as root causes for our exploding national debt/deficits during the Bush administration.  You can look at the data surrounding our debt/deficits by clicking here, about the Bush tax cuts here, and more on the cost of the 2 wars here.  But here are some reports for you process from history on these subjects.

Medicare Part D

According to the Congressional Budget Office (CBO)

The Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (generally referred to as the Medicare Modernization Act, or MMA) substantially expanded the federal Medicare program by creating the prescription drug benefit known as Part D.

According to the CBO, the Medicare Part D program cost less than anticipated.  Why?

Broad national trends in the prescription drug market have contributed significantly to the lower-than-expected spending for Part D. Many health care analysts, including those at CBO, expected in 2003 that growth in national drug spending would slow from the rapid rates observed in the late 1990s and early 2000s, but the magnitude of the slowdown that occurred surprised many observers.

Drug spending per person for the country as a whole increased by only 2 percent per year, on average, between 2007 and 2010, compared with average growth of 13 percent per year between 1999 and 2003, the five-year period before enactment of the Medicare Part D.  Drug spending per person in Part D also increased by 2 percent per year, on average, between 2007 and 2010. The greater-than-expected slowdown that began after 2003 caused national drug spending in 2012 to be about 40 percent less than the amount predicted by analysts at the Centers for Medicare & Medicaid Services in 2003.  CBO Report

But there is another question to ponder.  If the Democrat's version of Medicare Part D had been passed, how can we know for certain that it would have been better?

CNN, 2002

...during the Democrats’ weekly radio address, Sens. Jean Carnahan of Missouri and Debbie Stabenow of Michigan said that the Republican plan, while cheaper, just isn’t good enough. On May 1, two Senate Democrats — Bob Graham of Florida and Zell Miller of Georgia — offered a plan to add prescription-drug coverage to Medicare that would cost up to $425 billion over 10 years.  Backers of a GOP proposal said their plan is designed to cost less than $350 billion over 10 years.  CNN Report

Finally, are the costs of the two wars we entered into completely the fault of "Republican ideology"?   Let's see how congress voted.

Afghanistan War Powers Resolution

Passed – House of Representatives – 420 Yeas, 1 Nay

Passed – Senate – 98 Yeas, 0 Nays

Authorization to Use Force in Iraq

Passed – House of Representatives – 296 Yeas, 133 Nays

Passed – Senate – 77 Yeas, 23 Nays (Democrats voting Yea include then Senators Clinton and Biden)

So what do you think? (Since you're the one that matters.) Was it just 8 years of right wing ideology that got us into the mess we are in, or is there a good bit of political fiction afoot here? Get your vote on. 

Additional Resources

Our post on the Bush tax cuts and the current economic problems

You can read the entire Financial Crisis Inquiry Commission (FCIC) report and get easy access to the majority report and both of the dissenting reports at our Fast Facts section under Jobs/Economy.

VoteFacts original post date: September 27, 2012
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