Obama has recently declared: “The recovery is accelerating. America is coming back—which means the last thing we can do is go back to the same failed policies that got us into this mess in the first place. And that’s what’s at stake in this election.”
For now, I’m just going to address the later part of the quote, and will address the former in a separate article.
So what were those “failed policies”?
Regardless of your stance on the Bush tax cuts, Obama extended those, so that certainly couldn’t have been the failed economic policy he was referring to.
So maybe he was referring to the 2008 financial meltdown, which according to him was a result of too few bank regulations. He claims that the government needs to regulate banks. After all, the reason for the Great Recession (arguably a Depression if you asked me) is that banks were simply too irresponsible! They made bad gambles, the result of which crippled the U.S. economy. Naturally, the government needs to step in to make sure that such a catastrophe never happens again.
Small problem. The reason that the Great Recession occurred in the first place was because of government. But how could this be?
For one there’s the fact that the Federal Deposit Insurance Corporation (FDIC), which provides deposit insurance to banks, charges premiums that are significantly lower than they should be. The way that insurance should work is if you are a higher risk, your insurer should charge you higher premiums to make up for future losses due to your risk. Unfortunately, the FDIC doesn’t do a very good job in determining premiums and charges banks too little regardless of the financial risks that they take. As a result it essentially told the banks – “go ahead. Do what you want to do. Sure what you’re doing is extremely risky, but since you have to pay such low premiums it’s worth the risk.” Had a private insurer been the entity insuring depositors’ money, it would have charged banks higher premiums for taking greater risks. Thus, if the banks failed, there would be absolutely no problems because the insurance company would simply cover any losses. The FDIC improvement act was supposed to match premiums to risk better, but that’s been a failure and the FDIC reserve fund has been depleted.
Some people blame banks for lending out out too many loans to people who couldn’t afford them. We all remember the huge number of foreclosures that occurred six years ago. The entities that were actually responsible were the government sponsored enterprises Fannie Mae and Freddie Mac, which purchase mortgages, buy and sell mortgage-backed securities, and guarantee half of the mortgages in the U.S. In 1996, the Department of Housing and Urban Development directed Fannie and Freddie to provide at least 42% of their mortgage financing to borrowers with income below the median in their area. This target was increased 52% in 2005. The Department of Housing and Urban Development also required Freddie and Fannie to provide 12% of their portfolio (28% by 2008) to “special affordable” loans – loans to borrowers with less than 60% of their area’s median income. Fannie and Freddie were able to push banks out of the prime market because they were able to make loans that banks normally wouldn’t thanks to the backing of the U.S Treasury. Just to compete, banks had to give out loans that they normally wouldn’t have. In addition to all this, the Community Reinvestment Act of 1977 further encouraged banks to help meet the needs of borrowers. With all of these government Acts and programs encouraging lending and borrowing, both banks and consumers thought that they were doing what was in each of their best interests.
Even though the government was in many ways responsible for the 2008 meltdown, it’s easy for Obama and Pelosi to blame Bush and Republicans for everything that occurred. The problem is that it was mostly Democrats in Congress who enacted legislation that resulted in Fannie and Freddie guaranteeing more mortgages and legislation pressuring banks to give more people loans. Many Democratic congressman such as Barney Frank, yes, the writer of the Dodd-Frank bill, believed that everything that everything Fannie and Freddie were doing was perfectly fine. It was the Republicans who were, for the most part, against it. For example, the Bush administration tried multiple times to pass legislation to oversee Fannie and Freddie. Obama is telling us not to go back to previous failed economic policies; I guess he won’t be voting Democrat this November.
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