Commentary Magazine


Parsing the President

Certain patterns are beginning to emerge with President Obama. Among them is the need to closely parse what he says, because what he says can sound persuasive but, upon examination, tends not to hold up. To take just one example, Obama has said repeatedly, including at his press conference earlier this week, that:

What I won’t do is return to the failed theories of the last eight years that got us into this fix in the first place, because those theories have been tested and they have failed.

The assumption here is that the economic policies of President Bush — above all his tax cuts, presumably — are responsible for the current economic crisis we face. In fact, the Bush tax cuts — especially of 2003 — helped trigger and sustain 52 consecutive months of economic growth, a record for the Dow Jones Industrial Average (exceeding 14,000 at one stage), real GDP growth of 17 percent from 2000-2007, and, in 2007, a budget deficit that had shrunk to just over one percent of the GDP, which was significantly below the average over the last four decades.

Then came the economic crisis of late 2008. There are various reasons behind its occurrence, from easy money to insufficient capital reserves by investment banks. But if you were to pinpoint one culprit above any other, it would probably be the policies pursued by Fannie Mae and Freddie Mac, the two huge “government-sponsored enterprises” (GSEs) chartered by Congress, which own or guarantee around half of the mortgages in the United States. Peter Wallison of the American Enterprise Institute flatly says that Freddie and Fannie were “the source of the financial crisis we are wrestling with today.” Other economic experts concur.

The story is at once fascinating, discouraging, and alarming; for a good summary, it is worth consulting Stuart Taylor’s National Journal column from last year. But the short version is that at the mid-point of the decade, Fannie and Freddie began engaging in ever riskier lending, due in large measure to pressure from Congress (and especially liberal Democrats) to make mortgages available to low-income people who in the past would not have qualified for them. As Charles Duhigg wrote, “The ripple effect of Fannie’s plunge into riskier lending was profound. Fannie’s stamp of approval made shunned borrowers and complex loans more acceptable to other lenders, particularly small and less sophisticated banks.”

So long as housing prices were going up, this practice was not a problem; but when housing prices began to plummet, a small but significant portion of the population reneged on their mortgages, causing the banks to seize up. The effects extended throughout our entire economy. The housing crisis, then, begat the credit and banking crisis, which begat the financial crisis, which begat an alarming downturn in the world economy.

President Bush, along with others like John McCain and Alan Greenspan, argued for reforms of Freddie and Fannie that would have been quite beneficial. But those efforts were blocked by Democrats. Indeed, a bill emerged from the Senate Banking Committee in 2005 that would have tightened regulations on Fannie and Freddie, but Senate Democrats killed it. For those interested: Barack Obama was a U.S. Senator at the time and did nothing to help forestall the impending crisis. He is in many ways inheriting an economic situation his colleagues in the Senate helped create. And as Wallison points out, contrary to conventional wisdom, deregulation did not occur in the financial sector and had nothing to do with the current financial crisis. So President Obama’s claim that the “failed theories of the last eight years” have gotten us “into this fix in the first place” is simply not true.

To correct the record obviously takes some effort. And for a man who promised to help “turn the page” on this kind of political nonsense, in which blame is affixed where it doesn’t belong by advancing intellectually unserious and misleading claims, eschewing this effort is a shame. Over time, we will see whether this turns into a pattern.