After numerous debates among candidates for the Republican nomination for president, several observations are pertinent. Most important, none of the candidates appears to have a coherent plan to address the unprecedented economic problems that the United States faces.
Principally because of the deflation of the enormous dual bubbles in the volume of credit and house prices that developed in the decade before 2006, we have lost some 8 million jobs and suffered a five-fold increase in the number of long-term unemployed workers. We have seen a 33 percent decline in average house prices in 20 major U.S. cities and a resulting loss of wealth of nearly $10 trillion in the form of home equity. We now have 13 million homeowners underwater on their mortgages. And we have experienced multi-year fiscal crises in nearly every state, thousands of local governments and the federal government.
The Republican candidates appear to have formed their viewpoints from the simplistic positions expressed in certain portions of the news media. In particular, the only cause of the financial crisis that triggered our current problems is said to be the behavior of Fannie Mae and Freddie Mac, along with the government mandate to increase homeownership rates among lower-income households.
In reality, a multitude of forces contributed to the financial crisis, the Great Recession of 2007-2009 and our continuing problems. These included a widespread, erroneous view that house prices were different from other prices — they could not fall. This increasingly prevalent view, in conjunction with emergence of mortgaged-backed bonds, credit default swaps and other esoteric derivatives, the reckless behavior of huge financial firms and incompetent or corrupt behavior of the rating agencies (private-sector entities) was instrumental. These factors account in large part for the enormous increase in risk-taking on the part of households, banks and other mortgage lenders that produced the financial crisis.
I heard no candidate mention the egregious behavior of such private firms as Goldman Sachs, Merrill Lynch, Citigroup, Countrywide Financial and other huge financial firms. These firms, knowing full well that they were (legitimately) regarded as too big to fail, ramped up leverage to unprecedented levels in their reach for easy profits and huge bonuses. These firms have essentially held the government hostage, not only because of their enormous financial influence in the political process but because their collapse in fact would wreak havoc on the economy.
Candidates have failed to mention that Fannie Mae and Freddie Mac did not originate sub-prime mortgages. In the latter stages of the bubble, they did begin aggressively buying bonds backed by such mortgages, thus helping to fuel the enormous expansion of the pipeline of credit to the housing sector. No candidate mentioned that Fannie and Freddie are privately owned firms whose top officers stood to earn multi-million dollar bonuses if near-term profits reached targeted levels. Such incentives account largely for the reprehensible and even fraudulent behavior of Fannie and Freddie.
The most obvious single factor accounting for the twin bubbles, their inevitable collapse and our continuing problems is the view that virtually all regulation and supervision imposed on enormous financial firms are counterproductive and should be eliminated. This laissez-faire philosophy gained ascendancy with the election of President Reagan in 1980. It was further promoted under President Clinton in the 1990s and reached its apogee during the somnolent administration of George W. Bush and former Fed Chairman Alan Greenspan.
As a result, while government looked the other way, we witnessed an unprecedented degradation of lending standards by private-sector firms. This includes the emergence of undocumented, zero down payment and negative amortization mortgages, and even “ninja”(no income, no job or assets) mortgages. Candidates have made no mention of the obvious need for regulation and supervision here. In fact, all remaining candidates appear dead set on repealing (without replacing) the 2009 Dodd-Frank Act. This law, though imprudently watered down, was enacted in 2009 in an effort to reduce the likelihood of future severe crises.
In an early debate, eight participating candidates were asked if they would retain Federal Reserve Chairman Ben Bernanke. All indicated they would replace him, a sad commentary on the their economics acumen. In truth, Bernanke is one of very few heroic figures in the entire fiasco. His series of aggressive and innovative actions, implemented immediately following the disastrous failure of Lehman Brothers in September 2008, prevented an impending financial meltdown. Such a cataclysm might well have been even more disastrous than the Great Depression of the 1930s. The charge that Bernanke has conducted “irresponsible, inflationary policies” cannot be reconciled with the fact that our inflation rate is currently below the rate generally considered by economists to be optimal, and below the Fed’s implicit target of 2 percent per year.
Finally, the candidates have been silent on perhaps the most serious long-term economic problem the United States faces: the alarming increase in income inequality, the 30-year stagnation of the median income and the decline of the American middle class. Rather than an intelligent discussion of potential ways to reverse these disturbing trends, all the candidates can muster is a pathetic charge of “class warfare” a charge that sheds no light on the issue.
Altogether, the debates have provided little insight or encouragement for American voters seeking enlightened discussion of crucial economic issues facing the nation.
Lloyd B. Thomas Jr. is a professor of economics at KSU and author of the book, “The Financial Crisis and Federal Reserve Policy,” published in 2011.