It is heard constantly if one is a regular viewer of Fox News. The recovery from the housing crash of 2007-2008 was the slowest recovery since the Great Depression. For whatever reason, the recovery from a boom and bust that had everything to do with the Clinton and Bush administrations is left to Obama to fix. No matter who made the mess in the first place, history doesn’t care about the guy who left the mess; it cares about who cleaned it up.
While I’m hardly a fan of Barack Obama’s policies, I’m willing to stick up for him when the rabid uninformed right is at his tail. Contrary to popular belief, the housing boom and bust had much less to do with political moves under Clinton and Bush and more to do with the monetary policy coming from the Federal Reserve.
A President is a politician. As American citizens we should not, at this point, expect a politician to know anything about fundamental economic principles, much less principles that would go against the policies of those who control our nation’s money supply and set our interest rates. Alan Greenspan, Ben Bernanke, and Janet Yellen are off limits when it comes to political discourse. This is why Donald Trump as a candidate berated Janet Yellen, but as a President endorsed her reaffirmation.
Those who have the knowledge ultimately wield the power, even over those who possess power in the public eye. The economists at the Federal Reserve determine our nation’s monetary policy, and it was under their watch that the housing market saw an enormous boom and tremendous crash. Don’t blame the politicians. They’re idiots. Blame the bankers. The center bankers.
Long before George W. Bush got into office Alan Greenspan had the reputation for being able to pin point the perfect interest rate to ensure steady growth without a bubble emerging. In the late 1990s hundreds of companies started popping up, claiming to be the next big “internet business”. People began investing in these companies even though their fundamentals (revenue, profit, etc) were terrible. Eventually, these businesses went belly-up in what is now known as the “dot-com bubble”.
Following 9/11, George W. Bush encouraged the American public to spend, spend, spend. He fell for what is a widely held economic fallacy – that consumption fuels an economy. In addition to the President telling the public to buy more stuff, the Federal Reserve began dropping interest rates to record lows, making homes more affordable. Owning a home became seen as a right of all Americans, and it was up to the government to make this dream a reality by any means necessary. Artificially low interest rates drove down prices, drove up demand, and fueled a massive bubble.
It was only a matter of time before that bubble burst, and it did so in 2007. Hundreds of thousands of people were shocked when their interest rates started going up. People couldn’t afford their mortgages anymore, and with foreclosures and short sales on the market the average home price fell. People found themselves owing more on their mortgage than their house was actually worth. They were “under water”.
To fix this problem, the federal government turned to the Federal Reserve Bank. The bank made a deal to bail out the banks that insured these loans, keeping the banks from going under. The Fed also launched the first round of “quantitative easing” which essentially meant buying Treasury bonds, which would then be used to buy stocks and prop up the market. The fallacy of an economy built on consumption lived on.
In January 2009 Barack Obama takes office. Under his watch Federal Reserve Chairman Ben Bernanke launches QE rounds 2 and 3. The Fed buys more and more treasury bonds and attempts to “stimulate” the economy more and more. The result was very poor. The stock market went up, but consumer prices, which needed to fall, remained at the same level. During a boom prices skyrocket. The cure is that prices should come down. The Federal Reserve worked to keep prices high.
Prices remained high, even though millions of people were losing their houses and their jobs. Naturally, the market would have corrected for this, and prices of consumer goods, housing, (and the stock market) would have come down. The Fed worked to keep the price of consumer goods, housing, and the stock market high, even as people were struggling to find employment. This was a mistake on the part of the Fed and made the recovery take much longer than it should have.
This was not the fault of politicians, however. The bust happened under George W. Bush, and it wasn’t caused by Bush. The “recovery” happened under Barack Obama, but it’s failures are not his fault. They are the fault of the faulty economic reasoning of those in power at the Federal Reserve. They cling to flawed logic laid out decades ago by John Maynard Keynes.
Prior to Keynes, common economic theory lead us to believe that it was production, NOT consumption, that built an economy. It was only after Keynes sold his faulty economic ideology to politicians that it caught on. It sold so easily to politicians because Keynesianism wrote a blank check to politicians, providing them with an excuse for excessive spending. Deficit spending was labeled as a good thing because of its stimulative effects. This never quite worked out as we can see with our near $20 trillion in debt.
Once Keynesian ideology caught on with politicians, Presidents began nominating Keynesian economists to the head of the Federal Reserve. Since then, the only people who will ever be nominated to head America’s monetary policy have the same mindset of their predecessors.
Flawed Keynesianism is taught throughout America’s public schools, and it shouldn’t be any surprise that politicians know nothing of the alternative – allowing the free market to properly allocate resources, including capital and labor. Mainstream economics is the problem, and the alternative is Austrian Economics, but only one presidential candidate in the last two decades (if not longer) has been familiar with it – Ron Paul.
Is it really Barack Obama’s fault that he gave the Federal Reserve his trust, the same way his immediate predecessors Bush and Clinton did before him? With an understanding of the complex monetary dealings that were undertaken during Obama’s terms, one cannot honestly point the finger at Obama. The finger should be pointed at Ben Bernanke, Janet Yellen, and the Federal Reserve.