Coming Tonight: The Mythic Tale of How Barack Obama Averted the Next Great Depression
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If the Obama administration has its way, the “Great Recession” of
our own time, like the Great Depression of three quarters of
century ago, will be fondly and forever enshrouded in the clouds
of politically inspired myth. The administration wants everyone
to believe the myth of the averted depression, which is
like the jobs saved part of its risible “jobs created or
saved” metric, only larger and more breathtaking.
Even though things are bad today, President Obama and key
members of his economic team repeatedly suggest that we should be
thankful they are not a hundred times worse. No doubt we will
hear this again tonight, when the president gives his
state-of-the-union address. We will hear how the administration
has performed a Herculean feat in pulling the country out of the
downward spiral into another great depression.
In one of his 12 labors, Hercules diverted an entire river
to cleanse the Augean stables. In the updated version of this
ancient myth, Mr. Obama talks about the huge “mess” that he
confronted upon coming to office. In his telling, this “mess” was
years in the making — the result of a long period of
unrestrained “greed and irresponsibility,” caused by excessive
deregulation and a mean and uncaring reliance on “trickle-down
economics.”
Over the last two years, Mr. Obama has never ceased
inveighing against George W. Bush and — still more — against
the ghost of Ronald Reagan, the biggest champion in recent time
of anti-interventionist, free-market capitalism. Of course, the
late president was also the sworn enemy of tax-and-spend big
government.
Of Mr. Obama’s two great adversaries, Reagan is clearly the
more potent, if less often cited. Reagan was an undeniably
popular president upon leaving office, with strongly expressed
ideas that influenced people of both parties and that continue to
resonate in our own time. If Obamanomics is the antidote to
Reaganomics, it is the antidote to a set of ideas and policies
that led the country out of a long period of stagflation (under
the Nixon, Ford and Carter presidencies) and into a new era of
accelerated business creation, productivity and growth.
During his presidential campaign, Mr. Obama regularly
denounced the repeal of the Glass-Steagall Act that separated
commercial and investment banking. The repeal of this relic of
Depression-era law-making was, he has insisted, one of the
critical “deregulatory steps that helped cause this mess.”
The bill in question won broad support from both parties.
It passed the Senate on a 90-8 vote, with the enthusiastic
endorsement of ultra liberals like Chuck Schumer, the
Democratic senator from New York, and was signed into law by then
President Bill Clinton in 1999. During the heady days of the
dot.com boom, Democrats as well as Republicans were affected by
what the current administration might primly describe as an
excess of Reagan-like deregulatory zeal.
Clearly annoyed by candidate Obama’s criticism of this
piece of legislation, Mr. Clinton spoke out in its defense just a
few weeks before the November 2008 election — when the country
was in the full throes of the financial panic. He told
BusinessWeek: “We still have heavy regulations and
insurance on bank deposits, requirements on banks for capital and
for disclosure.” He pointed out that big financial institutions
in Europe have long been doing both commercial and investment
banking. Finally, and most tellingly, he drew attention to the
bill’s relevance to headline-making events of the day, saying: “I
don’t see that signing that bill had anything to do with the
current crisis. Indeed, one of the things that has helped
stabilize (emphasis added) the current situation as much
as it has is the purchase of Merrill Lynch by Bank of America,
which was much smoother than it would have been if I hadn’t
signed that bill.”
It is difficult to disprove a negative supposition (e.g.
things are bad today, but think how more terrible they might be
if the president hadn’t done this or that). There are,
however, good reasons for doubting the notion that the Obama
administration deserves credit for averting a second great
depression.
First, it is simply a fact that most of the critical steps
that were taken to stabilize the financial system predated the
Obama presidency. That includes the passage of the Troubled Asset
Relief Program (TARP) and government-encouraged consolidation
within the financial sector that eliminated free-standing
investment banks. These events happened during Mr. Bush’s term of
office. For better or worse, Mr. Obama thought well enough of the
Bush administration’s handling of the crisis to retain Ben
Bernanke as chairman of the Federal Reserve and to move Tim
Geithner, who had been in the thick of Bush’s crisis management
team as head of the New York Fed, to the position of Treasury
Secretary.
Second, no one — not even such left-leaning economists as
Paul Krugman or Joseph Stiglitz — is hailing the
administration’s $787 billion stimulus package as a landmark
success. It was sold on the basis of being a desperately needed
emergency measure that would keep unemployment from rising above
8 percent. That was a line in the sand that did not hold.
Instead, unemployment moved to 10 percent, where it remains
today.
Third, and finally, it is difficult to believe that this
administration could have stumbled across a cure to the dread
disease of another great depression when its diagnosis of various
elements leading to the financial meltdown of 2008 is so clearly
faulty. It critically overlooks government’s role in
causing the crisis. As Roger Parloff wrote in
Fortune magazine last January, “The fact that lenders
were hawking outlandishly risky mortgages to people who were
terrible credit risks was, in fact, no secret: It was bipartisan
national policy.”
Prominent Democrats including Barney Frank, Christopher
Dodd and Mr. Obama himself played a large and even dominant part
in forging this bipartisan debacle through their support for the
unregulated expansion of Fannie and Freddie, the
government sponsored entities that underwrote or guaranteed
hundreds of billions of dollars of suspect mortgages, and the
promotion of ACORN, the community action association that brought
pressure to bear on many banks to lower lending standards and
grant mortgages to people who failed to pay them back. Having
done so much to cause the problem through its actions
earlier this decade, this same Democratic Party claque has gone
out of its way to prevent a market-clearing solution by
pushing mortgage foreclosure mitigation programs that keep home
prices from finding a bottom.
This is a president — we will hear tonight — who is not
afraid to “stand up to” the lobbyists and special interests.
Yeah, yeah. Just don’t look for this president to mention that he
himself has been one of the leading recipients of Fannie Mae and
Freddie Mac campaign contributions. Don’t look for him to talk
about his close ties to Franklin Raines, the former CEO of Fannie
Mae who pulled down tens of millions of dollars in compensation
and bonuses before being ousted in a $6.3 billion accounting
scandal, and who went to become one of Mr. Obama’s top advisers
in the presidential race. Don’t expect him to talk a whole lot
about how, as a U.S. senator, he teamed up with Barney Frank in
successfully opposing Bush reforms to clean up the two
government-sponsored entities.
And he probably won’t bother to spend much time either on
matters of current concern in this same area, such as why the
government decided recently to cover an unlimited amount of
losses at the mortgage-finance giants, or why the government has
seen fit to give its blessing to multi-million pay packages for
the CEOs of Fannie and Freddie. Funny that this should happen
even as the president was going around the country screaming
bloody murder about the big bonuses about to be handed out to
“fat cat” bankers in the private sector.
The finger of blame, so freely wielded by this president,
rarely points inward — to himself or any of the leading
progressives in Congress.
None of this is to say that we should not worry about the
possibility of a second major depression.
In following policies that can only lead to increased
taxes, excessive borrowing, or both, and to greater uncertainties
for anyone owning or running a business, the Obama administration
may prevent a cyclical recovery and turn a bad recession into
something considerably worse. That happened under two earlier
presidents, Herbert Hoover and Franklin Roosevelt. Both of those
men believed in the cure-all properties of big government and
interventionist policies. In calling for so much public sector
spending and “investment,” they killed off any real investment –
meaning private-sector investment — and they created the Great
Depression. It could very well happen again.
Is there any way out of the mess we are in today? I like to
think so. A reader put it very nicely in responding to an earlier
article of mine. As he wrote, “Mr. Obama has created or saved
millions of Republicans.” If so, maybe he does deserve some
credit for putting us on the road to recovery.
