After the Great Depression, Democrats ran against Herbert Hoover for 30 years—and with great success. Even though Hoover’s policies were anything but market-oriented—he greatly raised spending, taxes, and tariffs in response to the 1929 Wall Street crash—Republicans took the fall for Hooverism. It wasn’t until Ronald Reagan that free markets were fully politically rehabilitated.
History may be repeating itself. Speaking in New Hampshire in July, Hillary Clinton warned voters not to turn back control of the economic levers to Republicans: “We wouldn’t have had to have a recovery if we hadn’t had the kind of poor management and bad economic policies that put us into the ditch in the first place.” She added, “We can’t go back to the old policies that failed us before.” This will become the Democratic mantra in the 2016 campaign.
The liberal narrative of the real estate meltdown of 2008 has been repeated over and over for seven years. To wit: Republican tax cuts and deregulation led to a massive bubble and overinvestment, which crashed the economy. And then Republicans bailed out their rich Wall Street fat cat friends, while working Americans lost their jobs, homes, and savings. Barack Obama’s activist government intervention helped save America from a second Great Depression.
Republicans by and large have had no response and instead pretend that the 2008 Great Recession never happened. The presidential candidates have had almost nothing to say about why the collapse occurred or what they would have done differently. Liberal and conservative voters are still seething with anger over the GOP’s hundreds of billions in bailouts to the bad actors of Wall Street. Republicans seem to hope delusionally that voters don’t remember what happened eight years ago or don’t care.
Oh, but they do. And an inability to explain the 2008 meltdown undermines the GOP’s strongest case against electing another Democrat to the White House, which is that Obama-nomics has given us a paltry recovery with the middle class and the poor losing ground.
After almost eight years, Republicans can surely do better. There are three points to be made about this ugly episode. First, liberal government policies are what caused the real estate bubble. Second, Democrats and the Fed are enacting policies that are inflating yet another financial bubble. Third, and most important, it’s time to swear off all future corporate and Wall Street bailouts.
The real estate meltdown isn’t that hard to explain. The stage was set with regulations during the 1990s, such as the revised Community Reinvestment Act, that strong-armed banks to relax their traditional mortgage underwriting standards and led to a culture of bad home loans, especially to low-income borrowers. All of this was done in the name of preventing discriminatory “redlining” loan practices.
Bill Clinton announced in June 1995, at a White House ceremony on expanding home ownership, that his new lending rules would “not cost the taxpayers one extra cent.” In 1996 HUD established quotas requiring Fannie Mae and Freddie Mac to devote at least 40 percent of their funds to low- and moderate-income housing. Former Texas senator Phil Gramm noted in the Wall Street Journal,
Peter Wallison, an expert who served on the federal Financial Crisis Inquiry Commission, explains how this corrupted the entire lending industry: “Once the standards were relaxed for low-income borrowers, it would seem impossible to deny these benefits to the prime market. Indeed, bank regulators . . . could hardly disapprove of similar loans made to better qualified borrowers.”
Alas, the Bush administration added fuel to the burgeoning subprime mortgage crisis by obsessively promoting through HUD higher and higher rates of homeownership. By 2006 about half of all mortgage loans made in the United States could be classified as nonprime for one reason or another.
Fannie and Freddie were the two giant enablers of the bubble by insuring (with taxpayer backing) an ever-larger share of new home mortgages. To its credit, the Bush administration did try to rein them in. In September 2003, Bush proposed a new federal agency “to regulate and supervise the financial activities of” these government-sponsored enterprises. At a 2003 House hearing, federal regulators testified that the reckless financial practices of Fannie Mae and Freddie Mac threatened the entire financial system. But congressional Democrats denounced such regulation as threatening “affordable housing.”
Rep. Barney Frank famously led the counterattack, saying, “I want to roll the dice a little bit more in this situation towards subsidized housing.” And that is what Congress did.
Meanwhile, private mortgage lenders went wild, to the cheers of liberals and bank regulators. During the housing mania of 2005-07, Countrywide issued tens of billions of dollars of subprime mortgages with down payments of 5 percent or less. Liberals chose to ignore that the chairman of the Senate housing oversight committee, Chris Dodd, a liberal Democrat from Connecticut, received sweetheart loan deals from Countrywide. (Liberals who complain to this day that few of the Wall Street bad actors went to jail have never argued for a prison cell for Dodd or other public servants who benefited from sweet deals as “friends” of Countrywide’s CEO.)
There was plenty of blame to go around during the housing frenzy, including the underwriters and the credit rating agency cartel that allowed millions of bad loans to be issued. Importantly, the Federal Reserve facilitated this bubble through years of near-zero interest rates and floods of cheap money into the economy.
When the Fed finally realized it had to rein in its loosey-goosey monetary policy in late 2006, soaring housing prices slowed and then tipped into decline. The housing bubble burst. The Case-Shiller Home Price Index shows that housing prices across the country declined an average of about 27 percent from their peak in July 2006 to the end of 2008. This triggered a financial panic as dominoes fell.
In sum, bungling interventions by Congress, the Fed, and the regulators didn’t alleviate the crisis, they fanned the flames. This reality didn’t stop Ben Bernanke—Fed chairman at the time—from boasting this week that the monetary interventions during the financial crisis worked just as planned and have created a high-employment, low-inflation economy. History is being rewritten as we speak. Fannie and Freddie lost $150 billion, yet liberals have fought to keep these corrupt government-sponsored enterprises open for business, while conservatives like Rep. Jeb Hensarling of Texas, head of the House Financial Services Committee, have tried in vain to protect taxpayers from future losses once and for all by privatizing them.
Republicans should also be warning of another financial bubble thanks to Obama policies. Dodd and Frank wrote the regulatory laws to prevent the kind of housing crisis that they played an instrumental role in causing in the first place. That law and its plethora of rules is leading to a consolidation in the banking industry, as the “too big to fail” whale banks swallow up the minnows, which only puts taxpayers on the hook for future bailouts. We should want more community banks, not fewer.
Worse yet, to this day Fannie and Freddie are still securitizing hundreds of billions of dollars of mortgages. Many of them are with down payments of as low as 3 percent, as the Obama administration is on a Bush-like homeownership push. Have we learned nothing?
Finally, the Fed is stuck on its zero interest rate policy, which is how we got into the mess in the first place. Liberals have cheered Fed chairman Janet Yellen—as has Wall Street, which is again addicted to cheap money. Isn’t this all starting to sound familiar?
Where Republicans were most complicit in the entire sordid debacle was in tossing out the window their free-market principles in the fall of 2008 and agreeing to bail out the lenders, insurance companies, and investment firms. It was, after all, a Republican president and a Republican House that approved the hundreds of billions of dollars of bailouts known as TARP. The Bush philosophy under Treasury secretary Hank Paulson was that we had to undermine the principles of free market capitalism in order to save it.
It speaks volumes about the legacy of this fiasco that Bernie Sanders, the socialist, attacks the GOP mercilessly and persuasively for the 2008 Wall Street bailouts. Voters to this day want to know why the fat cats got hundreds of billions in bailouts and the middle class got a financial get well card.
The author Amity Shlaes argues that the bailouts have created a lingering “trust deficit” with voters. She suggests a new pledge to be signed by Republican candidates for the White House and Congress to never again vote for a business bailout. The “no bailout” promise could be the cousin of Grover Norquist’s “no new taxes” promise, which has held up for 25 years, ever since George H. W. Bush broke his “read my lips” promise to voters with his 1990 tax hike.
This shouldn’t be hard to do because massive bailouts to big business are much more in keeping with the Democratic philosophy of big government than the GOP’s laissez-faire ideals.
The daunting political reality is this: Republicans are at risk of losing what is shaping up to be the most important election since 1980 if voters think the GOP is the party of Wall Street rescue boats and corporate safety nets. And they have yet to explain to voters that the financial debacle came from too much government spending, borrowing, and regulating, not too little. Whichever candidate gets on the big stage and tells this story to the American people, while denouncing bailout nation, is the one who should be the nominee. But so far, none has stepped up.
Stephen Moore is a senior fellow at the Heritage Foundation. Peter Ferrara is a senior fellow at the Heartland Institute.
