Presidents generally receive more credit than they deserve when the economy is doing well, and more blame than they deserve when it is floundering. There does not exist a simple box of tools that guarantee economic growth, and many of the short-range tools that do exist come with some pretty hefty negative consequences down the line.
But President Obama has taken this insight to a new level. In his telling, ever since he single-handedly saved the United States from a second Great Depression, he has had no responsibility for anything else that has taken place. The responsibility for anemic growth and high unemployment, which increasingly looks like chronic unemployment, belongs to his predecessor George W. Bush, and more recently, the Japanese tsunami, automation – i.e., modernization, the meltdown of the eurozone, and the obstructionism of the Republican-controlled House that has failed to vote in favor of presidential nostrums that Republicans view as inimical to future economic growth.
One can only sympathize with the President’s plight: Voters say that the economy is the most important issue for them, and the economy is in dread. To the extent that Obama is viewed as “owning” the economy, his re-election is doomed. Fall guys must be found.
Unfortunately for the President, each of his excuses is readily refuted, and in easily digested sound bites. Which is not to say that the Romney campaign has yet effectively done so.
First key point: Obama entered into office with the largest congressional majorities at the disposal of any president in decades. Though Republicans control the House today, and may reclaim the Senate in the coming election, Obama had free rein to do whatever he wanted with respect to the economy in his first two years in office. Instead he devoted himself to a total government overhaul of the health care sector of the economy and speeded the United States towards a fiscal crisis. He is in no position today to complain of Republicans preventing him from taking necessary measures, when he could have enacted any such measures for two years.
Second key point: The attribution of the state of the economy today to factors outside the President’s control will not bear scrutiny. As Bret Stephens pointed out in the Wall Street Journal last week, the economy hummed during the last years of the Clinton administration, despite international financial crises every bit as disruptive as the current travails of the eurozone or the Japanese tsunami. In 1997, the Asian “tigers” imploded, causing a Wall Street panic that saw shares drop 7.2% in a single day. Yet the economy grew 4.5% that year and the next, and 4.9% in 1999. Unemployment was at 4.2%, and the government ran a budgetary surplus.
Third key point: Democrats bear more of the responsibility for the financial meltdown of 2008. This last one is perhaps the most important because public opinion polls continue to show that voters place more of the blame for the current economic doldrums on former president George W. Bush than on President Obama. As long as that is the case, Romney’s attacks on Obama’s economic record are somewhat blunted, and the President can continue to try to find enough payoffs for different special interest groups to cobble together an electoral majority.
Here the “killer app” has been supplied by an unlikely source, New York Times business reporter Gretchen Morgenson and financial analyst Joshua Rosner, authors of Reckless Endangerment: How Outsized Ambition, Greed, and Corruption Led to Economic Armageddon.
The Great Villain at the center of story is James Johnson, the ultimate Democratic Party and Wall Street insider – he ran Walter Mondale’s campaign, headed John Kerry’s V.P. search committee, and sits on the board of Goldman Sachs and was on the board of the now defunct Lehman Brothers. As CEO of Fannie Mae, Johnson saw an opportunity to qualify for obscene bonuses, based on dramatically increasing Fannie Mae’s government-backed lending. The scheme was aided and abetted by leading Democratic politicians – Barney Frank, Nancy Pelosi, Maxine Waters, and Christopher Dodd – who protected Fannie Mae from scrutiny, and asserted that its lending practices were financially sound.
The key to the scheme was an unholy alliance between all those the Tea Party loves to hate – community organizers, like ACORN and La Raza, greedy Wall Street mortgage brokers, and liberal Democrats. The community organizations (please note that only one former community organizer is running for president) had little trouble convincing gullible politicians that minority groups were being shut out of the homeownership mortgage market by racial discrimination. The solution: Do away with traditional lending practices – e.g., documentation, proof of credit-worthiness and the like.
The junk mortgages were then securitized and sold by Wall Street firms, generating huge profits and astronomical bonuses for Johnson, who made between $200-500 million during his tenure at Fannie Mae. Taxpayer supplied money was employed to fuel a huge lobbying effort on behalf of Fannie Mae, which also happened to employ Barney Frank’s very good friend and Nancy Pelosi’s son. The result, as described by Walter Russell Mead, was: “Millions of financially unsophisticated, low income people were stuck with obscenely unfair mortgages, honest whistleblowers were subjected to savage personal attacks, home prices lost all touch with reality, taxpayers were stuck with losses that may approach one trillion dollars, and financial markets were poisoned almost beyond repair.”
The 2008 financial meltdown was widely cited as proof of the limitations of market capitalism, and the need for ever greater regulation of markets. Yet what Reckless Endangerment actually chronicles is the danger of crony-capitalism – the unholy alliance of big business and government to the disadvantage of small business and entrepreneurs. Tea Partiers give away nothing to the Occupy Wall Street crowd in their general suspicion of Wall Street.
The complex financial story is told as a simple morality tale, with prominent Democrats and constituencies in the role of villains. As such, the tale lends itself to attack ads – Sheldon Adelson are you listening? – that demonize Democrats, divide important Democrat constituencies – i.e., Wall Street fat cats from blue collar union workers – while uniting disparate Republican constituencies. It is a story, according to Mead, of how “liberal Wall Streeters raped every one else – and how the organized leadership of other groups [i.e., Democratic politicians and constituencies] colluded in the attack.”
The burst housing bubble also strikes a stake into the heart of the animating article faith of President Obama – government holds the solution to every problem. The housing bubble was largely driven by the liberal goal of expanding home ownership to those who were by every traditional measure not creditworthy and could never have qualified for mortgages other than by abandoning all the old rules of prudent lending and backing that imprudence with the public’s money.
As such, it is not only a tale of human venality – the higher up the ladder the greater was the venality – but a cautionary tale about the limits of government.
This article first appeared in Yated Ne’eman.