After the Great Depression, Democrats ran against Herbert Hoover for 30 years—and with great success. Even though Hoover’s policies were anything but market-oriented—he greatly raised spending, taxes, and tariffs in response to the 1929 Wall Street crash—Republicans took the fall for Hooverism. It wasn’t until Ronald Reagan that free markets were fully politically rehabilitated.
History may be repeating itself. Speaking in New Hampshire in July, Hillary Clinton warned voters not to turn back control of the economic levers to Republicans: “We wouldn’t have had to have a recovery if we hadn’t had the kind of poor management and bad economic policies that put us into the ditch in the first place.” She added, “We can’t go back to the old policies that failed us before.” This will become the Democratic mantra in the 2016 campaign.
The liberal narrative of the real estate meltdown of 2008 has been repeated over and over for seven years. To wit: Republican tax cuts and deregulation led to a massive bubble and overinvestment, which crashed the economy. And then Republicans bailed out their rich Wall Street fat cat friends, while working Americans lost their jobs, homes, and savings. Barack Obama’s activist government intervention helped save America from a second Great Depression.
Republicans by and large have had no response and instead pretend that the 2008 Great Recession never happened. The presidential candidates have had almost nothing to say about why the collapse occurred or what they would have done differently. Liberal and conservative voters are still seething with anger over the GOP’s hundreds of billions in bailouts to the bad actors of Wall Street. Republicans seem to hope delusionally that voters don’t remember what happened eight years ago or don’t care.
Oh, but they do. And an inability to explain the 2008 meltdown undermines the GOP’s strongest case against electing another Democrat to the White House, which is that Obama-nomics has given us a paltry recovery with the middle class and the poor losing ground.
After almost eight years, Republicans can surely do better. There are three points to be made about this ugly episode. First, liberal government policies are what caused the real estate bubble. Second, Democrats and the Fed are enacting policies that are inflating yet another financial bubble. Third, and most important, it’s time to swear off all future corporate and Wall Street bailouts.
The real estate meltdown isn’t that hard to explain. The stage was set with regulations during the 1990s, such as the revised Community Reinvestment Act, that strong-armed banks to relax their traditional mortgage underwriting standards and led to a culture of bad home loans, especially to low-income borrowers. All of this was done in the name of preventing discriminatory “redlining” loan practices.
Bill Clinton announced in June 1995, at a White House ceremony on expanding home ownership, that his new lending rules would “not cost the taxpayers one extra cent.” In 1996 HUD established quotas requiring Fannie Mae and Freddie Mac to devote at least 40 percent of their funds to low- and moderate-income housing. Former Texas senator Phil Gramm noted in the Wall Street Journal,
By the time the housing market collapsed, Fannie and Freddie faced three quotas. The first was for mortgages to individuals with below-average income, set at 56% of their overall mortgage holdings. The second targeted families with incomes at or below 60% of area median income, set at 27% of their holdings. The third targeted geographic areas deemed to be underserved, set at 35%.
Peter Wallison, an expert who served on the federal Financial Crisis Inquiry Commission, explains how this corrupted the entire lending industry: “Once the standards were relaxed for low-income borrowers, it would seem impossible to deny these benefits to the prime market. Indeed, bank regulators . . . could hardly disapprove of similar loans made to better qualified borrowers.”
Alas, the Bush administration added fuel to the burgeoning subprime mortgage crisis by obsessively promoting through HUD higher and higher rates of homeownership. By 2006 about half of all mortgage loans made in the United States could be classified as nonprime for one reason or another.