Revisionist history.
History is written by the victors, and the Obama Democrats will prove to be no exception to this rule. In the coming weeks (and beyond) expect to hear the president and his supports propagate that George W. Bush’s “tax cuts for the rich” created our economic downturn. The attack will lack any economic evidence, of course, other than the kind of simpleton cause and effect examples any middle schooler might put forth.
Indeed, quite the opposite from this fantasy took place — in straight fiscal years in 2007 and 2008 the US Treasury took in historic levels of tax revenues (immediately erased by Congressional spending, earmarks, pork, Medicare & Social Security… oh, wait I already mentioned useless and wasteful spending). It did this because the Bush tax cuts peaked in those years and just as we learned under Presidents Coolidge, Kennedy and Reagan, when you cut the marginal tax rate you actually increase tax revenue because the growing economy creates a growing pie to tax.
Rather, the cause of our economic misery was government meddling in the private markets (not a lack of regulation, and certainly not letting individuals keep more of their earnings). Stanford economist John Taylor explains:
Monetary excesses were the main cause of the boom. The Fed held its target interest rate, especially in 2003-2005, well below known monetary guidelines that say what good policy should be based on historical experience. Keeping interest rates on the track that worked well in the past two decades, rather than keeping rates so low, would have prevented the boom and the bust. Researchers at the Organization for Economic Cooperation and Development have provided corroborating evidence from other countries: The greater the degree of monetary excess in a country, the larger was the housing boom.
The effects of the boom and bust were amplified by several complicating factors including the use of subprime and adjustable-rate mortgages, which led to excessive risk taking. There is also evidence the excessive risk taking was encouraged by the excessively low interest rates. Delinquency rates and foreclosure rates are inversely related to housing price inflation. These rates declined rapidly during the years housing prices rose rapidly, likely throwing mortgage underwriting programs off track and misleading many people.
Adjustable-rate, subprime and other mortgages were packed into mortgage-backed securities of great complexity. Rating agencies underestimated the risk of these securities, either because of a lack of competition, poor accountability, or most likely the inherent difficulty in assessing risk due to the complexity.
Other government actions were at play: The government-sponsored enterprises Fannie Mae and Freddie Mac were encouraged to expand and buy mortgage-backed securities, including those formed with the risky subprime mortgages. [See: Community Reinvestment Act, Freddie/Fannie]
Government action also helped prolong the crisis. Consider that the financial crisis became acute on Aug. 9 and 10, 2007, when money-market interest rates rose dramatically. Interest rate spreads, such as the difference between three-month and overnight interbank loans, jumped to unprecedented levels.