In recent weeks, there has been much discussion surrounding how we got here. Here being at near 10 percent unemployment with no clear escape valve. From early on into this presidency, Barack Obama has made it clear that he knows who got us into this mess and how it was done.
There is little that I find more frustrating than the the claim that it was conservative principles and supply side economics that caused this mess. There are many reasons we are here but there is certainly one reason that, at least in my mind, stands head and shoulder above the rest. This country has not learned how to accept and get through the consequences of our decisions.
Following World War 2, the United States saw an enormous economic expansion. In fact, the largest economic expansion the country had ever seen up to that point. At the time, lending institutions called “Savings & Loans” or S&Ls, were lending money to homebuyers.
The capital for these home loans came from savings accounts which the S&Ls also managed. The S&L would offer very high interest rates to attract depositors to open savings accounts with them. In turn, they would offer loans at very high interest rates to finance these savings accounts. The high interest loans would often go to risky borrowers who, more often then not, were poor.
In 1966, Congress decided that this was unacceptable under the idea that while the rich got richer off their savings accounts, the poor got hosed with high interest loans. In response, they capped the interest that could be offered on Savings accounts through S&Ls.
This put a strain on the S&Ls ability to do business and to mitigate the risk of lending to high risk borrowers. With savings depositors defecting to traditional banks, S&Ls invented new ways to offer low payments with high interest rates for their high risk clientele. New loans packages were invented such as “interest only” loans and adjustable rate mortgages.
By 1979, S&Ls were doing very poorly and the Government finally recognized that over regulation was strangling their industry. So in 1980 & again in 1982, legislation was passed to massively deregulate the S&L industry.
Furthermore, the government insured all of the activity that the S&Ls were undertaking in hopes that the industry would regain profitability if they knew that no matter what, the government had their back.
This had the unintended consequence of eliminating any concern the lenders had with who they were lending to or the likelihood they would be paid back. Given that the companies had so much ground to cover just to reach profitability, they made careless loans to borrowers who were not in a position to responsibly pay them back. Within 5 years of the deregulation, the S&Ls were going out of business as loans were defaulting.
As they were promised, the government bailed them out of these bad debts at a 124 billion dollar net loss to the tax payer, fully calculated by 1999.
This probably sounds familiar.
This is almost a carbon copy of what happened recently with the financial meltdowns in 2007-2008. This time it was the traditional Banking & mortgage industry. The mandate to lend to low income, high risk borrowers came in the form of the “Community Reinvestment Act” passed by Jimmy Carter in 1978 and dramatically expanded under Bill Clinton.
As before, lenders were encouraged to loan money to people they would normally find to be high risk. The government once again offered to insure the loans, should anything go wrong.
As we all know, it did. And when the chickens came home to roost, the government bailed them out. This time to the tune of 800 billion dollars.
Then in 2008, Barack Obama was sworn as the 44th President of the United States promising to turn away from the practices of old that had “gotten us into this mess.”
Shortly after taking office, he signed into law a $787 billion package of borrowed money to shower America with jobs. Most of it was swallowed up in the black hole deficits of various state and local governments and the often lauded 2 million jobs “created or saved” have all but netted zero nearly two years later.
Additionally, his administration continues to bail out Freddie Mac & Fannie May, the two government subsidized lending institutions who served as the insurer of all the bad debt until they went bankrupt themselves.
There is of course an incredibly complex set of circumstances playing out over almost a century. There are many factors from greed, to corruption, to burdensome government that played a role.
But there is a common thread as well.
That thread is inability for government to allow consequence. In the 1930’s during the Great Depression, Herbert Hoover at first responded to the stock market crash by doing nothing. His intention was to allow the free market to “fix” the problem. As the problem deepened, the public outcry grew larger.
Finally, Hoover relented and began trying to “fix” the problem. Nothing that he attempted had any lasting results and eventually he was defeated by Franklin Roosevelt who spent the next decade and a half experimenting with government spending until finally, the war economy brought us out of the depression.
Ever since Hoovers PR nightmare, it has been the goal of Presidents to make sure that nothing like the Great Depression happen on “their watch.” Whether or not there are future consequences, the key is stabilization. This is exactly why and how bubbles are created.
And every time a bubble is created, the next one must be bigger in order to contain everything that the previous administrations had covered up.
So when the President says “We know what got us in this mess” you remember this: It’s people exactly like him that got us into this mess. We cannot allow them to keep covering it up with our tax dollars.