President Obama outright demagogued his way to re-election and more government control over the economy by blaming the free market for the 2008 financial crisis. Now the administration is pushing banks to make more home loans to borrowers with weaker credit by using government programs to insure them against default, at a time when the federal government is already underwriting 90 percent of mortgages. We have come full circle in the worst possible way.
Mr. Obama’s justification for the inauspicious economic climate has been that he inherited it from the previous administration and Republicans in Congress. During the 2012 campaign, he accused rival Mitt Romney of wanting “even bigger tax cuts for the wealthy and fewer regulations on Wall Street,” warning that Republicans would “double down on the same trickle-down policies that led to the crisis in the first place.” In a separate campaign ad, former President Bill Clinton said, “The Republican plan is to cut more taxes on upper-income people and go back to deregulation. That is what got us into trouble in the first place.”
Democrats won that argument handily. November 2012 exit polls showed 53 percent of voters still blamed George W. Bush for the economy. The election is over, but Democrats will continue to equate free-market reforms, as proposed by Republicans, with the 2008 financial crisis for as long as it resonates. This is pure fiction, and our prosperity as a nation depends on defeating this dangerous myth.
Fortunately, two new books seek to set the record straight as to the true origins of the Great Recession: “The Financial Crisis and the Free Market Cure,” by John A. Allison, former chairman and CEO of BB&T Corp., the 10th-largest financial-services holding company headquartered in the United States, and “Bad History, Worse Policy: How a False Narrative About the Financial Crisis Led to the Dodd-Frank Act” by Peter J. Wallison, former White House counsel to President Reagan and a member of Congress’ 2009 Financial Crisis Inquiry Commission.
Mr. Allison and Mr. Wallison offer a very different explanation, one that is rooted in logic and fact a rarity for Washington. It was not free enterprise that caused the crisis, but the actual government policies themselves. In a true free market, the institutions that failed would never have existed, and the reckless risk-taking on Wall Street would never have occurred.
Mr. Allison, the longest-serving CEO of a major financial institution, rejects that “deregulation” of the banking industry led to the collapse. Rather, the housing bubble was created by a combination of the Federal Reserve incentivizing excess leverage by printing too much money and keeping interest rates low, FDIC insurance guaranteeing deposits that financed high-risk lending activities, and decades of failed government “affordable housing” policies promulgated by Fannie Mae and Freddie Mac, two government-sponsored entities required by Clinton-era regulations to fill at least half of their lending portfolios with subprime mortgages.
Mr. Wallison, whose writings during the years leading up to the financial crisis warned about the dangers of failed government housing policy, also seeks to exonerate the free market. Government backing allowed Fannie and Freddie to dominate the housing market and created the infamous “moral hazard” in the system. Even when some in Washington, including some in the Bush administration, began to doubt the viability and integrity of Fannie and Freddie, the two government-sponsored enterprises were able to resist reform because they had become politically powerful.
Mr. Allison, Mr. Wallison and others admit that both Democrats and Republicans were guilty of supporting these reckless policies and corporate cronyism. Since the financial crisis, though, Democrats have repeatedly blamed deregulation and capitalism to serve their political ends more government control.
Mr. Obama and Mr. Clinton were never forced to defend their patently absurd assertion that the Bush tax cuts somehow caused the financial meltdown. Even The Washington Post’s fact checker gave that claim three Pinocchios. Democrats were never challenged to explain how Wall Street was “deregulated” under the Bush administration or held accountable for the Clinton administration’s relaxing of lending standards, subsidizing subprime mortgages and even threatening financial institutions that did not make loans to enough low-income, minority borrowers.
As the two authors point out, this is an important ideological battle. Democrats manipulated widespread public anger at Wall Street greed, predatory lending and bailouts into an indictment of the free market. Ultimately, they succeeded in enacting more government regulation over lending standards, how capital is allocated, and what constitutes “too big to fail” with the 2010 Dodd-Frank Act. The tragic irony is that Dodd-Frank institutionalizes the same bailouts and cronyism used to justify its existence.
It is imperative that advocates of limited government aggressively combat this perverse mischaracterization by explaining that were it not for government involvement, the market would have deterred or punished the reckless decisions that caused the crisis. Additionally, Republicans should admit their past culpability and reject even the best-intentioned cronyism going forward.
There is certainly room for reasonable debate over what financial regulations are necessary to protect the integrity of the system, but the left’s condemnation of the free market is factually inaccurate and intellectually dishonest. Democrats were instrumental in creating the housing bubble. Yet they incessantly blame the free market for the collapse of one of the most heavily regulated industries in America, while enacting 2,300 pages of new regulations under Dodd-Frank. Now, incredibly, they want the taxpayers to subsidize the same abhorrent behavior again.
Christian B. Corrigan, 27, is a Washington lawyer.