My 13-year-old son told me at the dinner table the other day that Franklin Roosevelt was one of America’s “greatest presidents” because “he ended the Great Depression.” He’s usually a good student, so I checked where he got this tripe and sure enough the fairy tale was right there in his American history book.
Sure enough his text book tells kids that the New Deal ended the Great Depression and even saved capitalism. Of course the New Deal exacerbated the pain and financial devastation of a stock market crash, and unemployment lingered in double digits for a decade after Roosevelt was elected until the start of World War II.
We get this kind of rampant revisionism because the left writes the history books — which they are doing right now.
Here’s the latest story line: bailouts, trillions of dollars of government spending and debt, easy money, and re-regulation of Wall Street ended the 2008 Great Recession. The myth took on new life last week when Ben Bernanke took a bow in The Wall Street Journal for in his mind saving the economy with his $3 trillion of quantitative easing and zero interest rate policy. No, actually this is what created the crisis. Don’t be surprised if Mr. Bernanke receives a Nobel Peace Prize.
As Peter Wallison of the American Enterprise Institute and other scholars have thoroughly documented, the crash of 2008 was caused by the Federal Reserve’s easy money policies for nearly a decade, government housing policies that led to preposterous mortgage loans being issued, and massive overleverage of government, companies, and households.
Why does any of this history matter? Since Washington doesn’t understand what went wrong in 2007 and 2008, so the Fed, the White House and Congress are recreating the very same conditions for another financial bubble. If it pops, we could replay the same devastating effects as occurred during the first bubble in 1999 and 2000. It is doing so in four ways:
First, the Dodd-Frank regulations are causing one of the greatest consolidations of the banking industry since the Great Depression. Those indispensable small savings and loans that Jimmy Stewart operated in the movie “It’s a Wonderful Life” are disappearing from the American landscape. This is because only really big banks have the size to spread the costs of Dodd-Frank compliance officers and costs. So we have created a competitive advantage that allows the sharks to swallow the minnows. Meanwhile, the “too big to fail” safety net to Bank of America, Citi, and other titans exacerbates this cost advantage of big banks and thus makes bailouts even more likely in the future.
Second, Fannie Mae and Freddie Mac are engaged in the same low interest rate lending mania of 2004-07 and the Obama administration is on a Bush-like home-ownership push. Some Republican House heroes like Jeb Hensarling of Texas wanted to eliminate taxpayer subsidies to Fannie and Freddie but the housing lobby kept them alive. So now the two government enterprises are back issuing taxpayer guarantees on mortgages with as little as 3 percent down payment. Have we learned nothing at all?
Third, the Fed refused to raise interest rates off zero in September, and, hello, that easy money policy is how we got into the mess in 2000 and then in 2008. Wall Street cheered Janet Yellen’s decision to keep the cheap dollars flowing. Isn’t this all starting to sound familiar?
Finally, there is the saturation of debt. When the crisis hit in 2008 the national debt stood at a little under $10 trillion. Now we are at $18 trillion. Government is hopelessly overleveraged. The interest rate exposure is enormous with each one percentage point rise in long term rates causing the servicing costs of the debt to rise by about $1 trillion over 10 years. Meanwhile, on top of that, the Fed owns at least $1 trillion in mortgage debt and so if housing markets fall again, taxpayers get double walloped.
The point is that government and politicians have no learning curve. All of the conditions of financial wreckage are reappearing. This is why congressional Republicans absolutely should put up a fight on the debt ceiling by requiring more budget discipline as a condition of higher debt levels. They should require at least 8-10 percent downpayments on all government insured mortgages. They should repeal all or part of the Dodd-Frank bill that is destroying community banks, while promising voters they will never again bail out a bank or financial institution. Finally, they should be urging the Fed to restore sound money by gradually raising short term interest rates. And the presidential candidates should start warning voters that Washington is rebuilding another financial house of cards.
If they don’t, when the financial crash comes and Americans see their life savings disappear, the media and the history books will again blame Republicans for the destruction from the rampant financial negligence of government.
• Stephen Moore is an economic consultant with Freedom Works and a Fox News contributor.