Stephen Moore formerly
wrote on the economy and public policy for The Wall Street Journal, is a
distinguished visiting fellow for the Project for Economic Growth at The
Heritage Foundation. Read his research.
My 13-year-old son
told me at the dinner table the other day that Franklin Roosevelt was one of
America’s “greatest presidents” because “he ended the Great Depression.” He’s
usually a good student, so I checked where he got this tripe, and sure enough,
the fairy tale was right there in his American history book.
The textbook tells
kids that the New Deal ended the Great Depression and even saved capitalism. Of
course, the New Deal exacerbated the pain and financial devastation of a stock
market crash, and unemployment lingered in double digits for a decade after
Roosevelt was elected until the start of World War II.
We get this kind of
rampant revisionism because the left writes the history books—which they are
doing right now.
Here’s the latest
story line: bailouts, trillions of dollars of government spending and debt,
easy money, and re-regulation of Wall Street ended the 2008 Great Recession.
The myth took on new life last week when Ben Bernanke took a bow in the Wall
Street Journal for, in his mind, saving the economy with his $3 trillion of
quantitative easing and zero interest rate policy. No, actually, this is what created
the crisis. Don’t be surprised if Bernanke receives a Nobel Peace Prize.
As my fellow
Heritage colleague Norbert Michel and other scholars have thoroughly
documented, the crash of 2008 was caused by government policies and regulatory
failure, including easy money policies that flooded the markets with debt. Within
a decade, these policies led to preposterous mortgage loans being issued, and
massive over-leverage of government, companies, and households.
Now the Fed, the
White House, and Congress are recreating the very same conditions for another
financial bubble. If it pops, we could replay the same devastating effects as
occurred during the first bubble in 1999 and 2000. It is doing so in four ways:
First, the
Dodd-Frank regulations are exacerbating one of the greatest consolidations of
the banking industry since the Great Depression. Those indispensable small
banks, like the one Jimmy Stewart operated in the movie “It’s a Wonderful
Life,” are disappearing from the American landscape.
This is largely
because big government policies are slanting the system in favor of big banks.
Because of this, we have created a competitive advantage that allows the sharks
to swallow the minnows. Meanwhile, the “too big to fail” safety net to Bank of
America, Citi, and other titans exacerbates this cost advantage of big banks and
thus makes bailouts even more likely in the future.
Second, Fannie Mae
and Freddie Mac are engaged in the same low down payment lending mania of
2004-07, and the Obama administration is on a Bush-like homeownership push.
Fannie and Freddie are again guaranteeing mortgages with as little as 3 percent
down payment. Have we learned nothing at all?
Fannie and Freddie
are again guaranteeing mortgages with as little as 3 percent down payment. Have
we learned nothing at all?
Third, the Fed
refused to tighten its stance in September, and, hello, that easy money policy
is how we got into the mess in 2000 and then in 2008. Wall Street cheered Janet
Yellen’s decision to keep the cheap dollars flowing.
Finally, there is
the saturation of debt. When the crisis hit in 2008, the national debt stood at
a little under $10 trillion. Now we are over $18 trillion. Government is
hopelessly over-leveraged, and the interest rate exposure is enormous. With
each one-percentage-point rise in long-term rates, the servicing costs of the
debt rises by about $1.8 trillion over ten years.
The point is that
government and politicians have no learning curve. All of the conditions of
financial wreckage are reappearing. The presidential candidates should start
warning voters that Washington is rebuilding another financial house of cards.
If they don’t, when
the financial crash comes and Americans see their life savings disappear, the
media and the history books will again blame conservatives for the destruction
from the rampant financial negligence of government.
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