The Mess That Bush Didn’t Make and Why Obama Can’t Clean it Up
With Obama winning the election it’s all the rage to talk about how great things will be now. Specifically, there seems to be a lot of talk about how the economy will improve because Bush won’t be in office anymore. Our current economic predicament was all his fault, didn’t you hear?
Who got us into this mess?
The plain truth is that the US economy is so complicated no single person, or entity, can be held responsible. People would like to blame everyone from Greenspan to Congress. The honest answer probably has something to do with the spending habits of Americans. The average American household income is around 48k a year and the average credit card debt for an American household is 15k. That means that the average American household needs to pay 31% of their monthly income towards their credit cards to be clear of their credit card debt within a year. This is of course if you ignore interest, and that’s assuming they can avoid incurring additional credit card debt in the meantime. Ultimately, the current economic woes rest squarely on the shoulders of consumers who bought more house than they could afford, defaulted on their loans, and didn’t pay the banks the money they were owed.
However, like I said, it is complicated. The government regulations of the 90s that pushed for looser regulations for lending to sub prime borrowers is to blame. The government pressured lenders to provide loans to people who should never have qualified. This resulted in the ‘Evil’ sub-prime adjustable rate loans we have today. Sub-prime loans were the only way banks could loan money to those borrowers but still make money given the percentage of people they knew would default. The law makers of the past 8 years are to blame for not pushing harder to tighten up lending regulations when they still had a majority. The writing was on the wall and many people anticipated a housing bubble. However, Republican lawmakers were unable to get a handle on this when they had the chance.
Banks and lenders are certainly to be held responsible for the shoddy job they did at measuring the risk they were taking by lending money. Banks count on people defaulting on their loans, the problem is the banks counted on less people defaulting and home prices not dropping. Further, we can assign some blame to the people involved in the packaging, selling, and purchasing of the mortgage backed securities. It is now clear that none of these people had a good handle on the value of the goods in question.
Who this list doesn’t include is George W. Bush. Bush spent his time in office providing tax cuts because he recognized people needed their wealth more than the government did. He caused the U.S. to enter a war, if you want to call it that, which created a great many jobs. I personally don’t think the actions taken by the US were necessary and it’s true they cost the U.S. government quite a bit of money. Some may argue that this caused an increase in fuel prices and this hurt the economy. The problem is that the high gas prices we experienced were not high when compared to historical gas prices adjusted for inflation. Also, the primary cause of the explosion in the cost of gas has been attributed to increased gas consumption throughout the third world which was speculated to continue it’s upward trend.
Moreover, as the head of the executive branch Bush is not in a position to pass laws to solve any of these problems. His primary focus is foreign affairs and the U.S. government budget. He can claim something is broken, tell congress to fix it, tell congress how they ought to fix it, and repeat it ad nauseam; however, only Congress can make changes to fix these problems.
Bush didn’t cause this problem, he inherited a broken car and then someone came and stole the tires off of it.
Obama can’t put Humpty back together again.
Interestingly, this is one area and which both Obama and Bush have something in common. Neither of them can fix this problem. Obama is going to have one hell of a time convincing the democratically controlled congress to pass legislation making it harder for lower income borrowers, and borrowers with sub prime credit, to borrow money for a mortgage. The most he can hope for is to replace Bernanke and Paulson with people who will raise the interest rate and allow the free market to work.
Obama can’t afford to alienate his base by making it harder for them to own homes. He can’t anger his party by taking a stance in direct opposition to the current direction of the Democratic party. Obama believes we need to make it even easier for people to own homes. He has made statements talking about how Wall St. was flourishing while Main St. was suffering. I think it is clear now that Wall St. got it’s comeuppance. Obama has said he is going to push to make sure that this sort of thing doesn’t happen again. The truth of the matter is that his version of making sure this doesn’t happen again is to force these lenders to only provide fixed rate loans to these sub-prime borrowers. The rates on these loans will end up being either so high that they don’t help the borrowers or so low that the bank loses money because of the number of people who default on their loans.
I hear you now, “People won’t default on these loans because they don’t adjust”. Don’t be naive, people won’t stop using their credit cards. Massive consumer debt isn’t on it’s way out. The number of Black Friday shoppers and the amount they spent are both up compared to last year. People aren’t going to stop spending money. They may not make as much money this year, instead of buying a new car this year they may use all of their money for Christmas shopping, perhaps a few consumers are doing a little saving for the time being. Ultimately, however, most of these consumers are going to push themselves to the brink. They will place themselves in situations where they are just barely able to juggle all of the credit card payments, car payments, utility bills, and their mortgage. Next time it may not be an adjustable mortgage that breaks the camels back but it will happen all the same.
We may now be in an official recession, but Obama is going to have a hard time convincing all the soccer mom’s fighting at Toys R’ Us for the opportunity to charge that latest and greatest Elmo doll to their nearly maxed out Super Platinum Visa Card.