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Sunday, November 2, 2008

Who Caused the Recession?

Discussing Mike Ditka's empty bromides on the American job market, I ascribed this week's layoffs at Gehl (46, not 45) to the "Bush Recession." As expected, a couple commenters raged back (I paraphrase), "Well, what about your Democrats? They're in charge of Congress; it's their fault!"

Quick intellectual honesty check: If you believe that the Democrats who have controlled Congress for the past 22 months are responsible for the current recession*, do you also believe that the Republicans who had controlled Congress from 1995 to 2001 were responsible for the 2001 recession?

Ah, now we have to start thinking. Let's float some alternative theories on the cause of the current economic mess:

Neocons Did It: The War in Iraq

THE Iraq war has cost the US 50-60 times more than the Bush administration predicted and was a central cause of the sub-prime banking crisis threatening the world economy, according to Nobel Prize-winning economist Joseph Stiglitz.

The former World Bank vice-president yesterday said the war had, so far, cost the US something like $US3trillion ($3.3 trillion) compared with the $US50-$US60-billion predicted in 2003.

...The spending on Iraq was a hidden cause of the current credit crunch because the US central bank responded to the massive financial drain of the war by flooding the American economy with cheap credit.

"The regulators were looking the other way and money was being lent to anybody this side of a life-support system," he said.

That led to a housing bubble and a consumption boom, and the fallout was plunging the US economy into recession and saddling the next US president with the biggest budget deficit in history, he said [Peter Wilson, "Iraq War 'Caused Slowdown in the US," The Australian, 2008.02.28].

Bush Did It: Tax Cuts and Funding War with Foreign Credit

With China and other foreign countries absorbing Treasury securities directly, and U.S. corporations still coming off of their late-90's investment binge, the beneficiaries of the tax cuts absorbed newly issued securities primarily in the form of mortgage obligations and the bulk of the real investment was spent to build residential homes to excess. We are now seeing the results of that overinvestment.

So the policies of recent years have indeed been stimulative. But stimulative to what? Primarily to unproductive investment and poor credit. There is nothing wrong with debt that is incurred to obtain productive assets, legitimate national security, or the relief of suffering. In this instance, there is little to show but liabilities. The U.S. is now saddled with a burdensome federal debt, a deep current account deficit, reduced competitiveness, a weakened financial system, a tragic and needless loss of life on both sides of the war, and a growing indebtedness that allows major U.S. companies to be picked away by foreign hands like apples from a tree [John P. Hussman, "How the War, Tax Cuts, and the Swaps Market Debased the U.S. Financial System," HussmanFunds.com, 2008.07.21].

We Did It: Consumer Debt

There's no magic bullet, says Steven Fazzari, economics professor at Washington University in St. Louis. The root cause of the current economic slowdown in the U.S. goes back several decades. There has been a concurrent wave of increasing consumer spending and rising consumer indebtedness. In the past, consumer spending actually helped the economy as it raised firms' sales and encouraged more hiring. But the associated rise in household debt, most obviously in the recent housing bubble, has come back to haunt the U.S. [Shula Neuman, "Recession's Root Cause Is Consumer Debt, Expert Says," Washington University in St. Louis News & Information, 2008.03.31]

Commenters, feel free to join the link war. Post your favorite articles, fix the blame... and let us know who can fix the problem.

By the way, if you think Presidents have anything to do with the economy (and both McCain and Obama argue that they do), it's worth noting that during the last 50 years, the best economic growth has happened under Kennedy, Johnson, and Clinton. Next come Reagan and Carter in a tie, then Nixon and Ford. Both Bushes are at the bottom of the list. As I've said, if nothing else, vote your pocketbook... and vote Dem!

Recession: Last week's GDP numbers showed the economy shrank 0.3% during the third quarter. Some economists will say it's not a recession until we get two consecutive quarters of GDP contraction. The National Bureau of Economic Research defines a recession as a "significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales. Take your pick.


  1. it was jimmy carter's administration that ushered in the community reinvestment act that forced banks to lend to unworthy borrowers.

    you might also blame the fed for lowering interest rates so much that led to bad investments affordable.

    but in the end, it's the lenders and borrowers who are to blame. oil prices go up because of a growing middle class in india and china, as well as bloated usage in our country.

    but it is a mistake to give a president blame or credit for the economy. the economy will go as the economy goes. a president can only help push it along or slow it down.

    my biggest pet peave is when presidents and governors claim credit for creating jobs.

    that's all to say that i appreciate this discussion, but it's not a fruitful one.

  2. I agree that the lenders and borrowers are largely to blame. As for politicians, I've heard all sorts of ranting and roaring, and seen fingers pointing in every imaginable direction.

    The big question now is, "How do we keep this sort of thing from happening again?"

    If no consumers had fallen for the loan gimmicks, we would not be in this mess today. I was constantly offered adjustable rate mortgages and home equity loans by the mortgage company. I ripped those envelopes up right in the Post Office. I even called the lender and requested that they stop sending that stuff. (They did, pretty much.) But I realize that I'm a frugal old fuddy-duddy. I guess that characteristic turned out to be good for something, after all. When I heard about the impending problems with the mortgage market, I called the whole lot of the lenders a "bunch of corporate gangsters," paid off my mortgage company, and got them out of my life. Where did I get the money to do that? By saving, saving, saving.

    I don't want to get off on a "holier than thou" tangent here. God knows my character defects would turn your hair white if you knew about them ... but I'm glad I never fell for that "keeping up with the Gibiliscos" baloney.

    Caveat emptor! If citizens never assume responsibility for themselves, they're bound for trouble, no matter how protective and benevolent the government might become.

  3. Bravo Stan
    Citizens need to take responsibility for their actions.
    But I hear differently from people hoping Obama is elected.
    No more worry about mortgage, no more worry about insurance, no more this, no more that.
    What a wonderful life this is going to be.
    Right Cory?

  4. Actually, Anon 2:11, Barack Obama will expect a lot more real engagement and Stan-like responsibility from us citizens to make things happen. And yes, I do think that kind of citizen involvement will make for a more wonderful life.

  5. If this was because of the Community Reinvestment Act, why was there such a huge time lag? As far as I can tell, this problem had little to do with borrows who took the bank's money.

    The fundamental problem was the new type of "securitized debt" that was allowed to exist after the recent rounds of deregulation during 2001-2002 in combination with debt rating agencies that are self regulating. Essentially, big funds (those that recently went under and many more) were convinced that buying a big chunk of mortgages was a good idea. The problem was that the agencies (these are private organizations) that rated the debt had no regulatory oversight. The industry self regulated itself. These agencies rated debts as AAA (the highest form of reliability) but they should have been at best BBB grade (which no hedge fund would have snapped up because of the extreme risk).

    These big funds bought money products that they were told were high reliability but in actuality were highly risky. The funds had no way of evaluating the risk other than by looking at the rating agency's rating of the debt.

    So essentially, the private form of regulation that is meant to prevent this failed because it had no accountability and only made money off of selling its debt ratings to investment funds. Self regulation of the industry failed.

    Consumers who agreed to these mortgages have no responsibility here. The order goes consumers\banks\hedgefunds\rating agencies. Unfortunately, those at the top of the regulation system (rating agencies) found a profit motive for not properly performing.

    Welcome to industry self regulation. If a government body had been in place, there would be no profit motive and the system would still be solvent.

  6. "Barack Obama will expect a lot more real engagement and Stan-like responsibility from us citizens to make things happen." Huh????

    All we have heard from him is not to worry, the gov't and myself are here to save you.

    Heard an Obama supporter on the radio stating she was so happy now that Obama was elected because now she doesn't have to worry anymore about putting gas in her car or paying her mortgage. So much for personal responsibility!

  7. Anon: Wrong. You're listening to what Fox News and Rush say what they wish Obama was saying, not what Obama has actually been saying all along. Here are some quotes and sources (not that you'll read them):

    "It doesn't matter how much money we put in [to education] if parents don't parent." [Obama, 2008.02.29]

    An Obama supporter, asked in February what President Obama would do for blacks: "Nothing. What needs doing, we got to do it ourselves. He just needs to be himself. Be a role model." [Lois Roy, 2008.02.29]

    "There will be setbacks and false starts. There are many who won't agree with every decision or policy I make as president. And we know the government can't solve every problem. But I will always be honest with you about the challenges we face. I will listen to you, especially when we disagree. And, above all, I will ask you to join in the work of remaking this nation, the only way it's been done in America for 221 years - block by block, brick by brick, calloused hand by calloused hand. [Obama, Grant Park victory speech, 2008.11.04]

    There. Now you can't say that all you've heard is that Obama says the government is here to save us. Obama has said just the opposite. Whether you believe him is another question, but the claim you made above, Anon, is flat wrong. Quit whining and start working with the rest of us to solve America's problems.


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