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The Bush Hangover

What got us into this mess...and what can get us out.

Sep 24, 2012, Vol. 18, No. 02 • By PETER J. WALLISON
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Despite—or because of?—continuing bad economic news, President Obama has doubled down on the argument that Mitt Romney and the Republicans will take the country back to “the failed policies that got us into this mess.” His argument is simple: While his policies haven’t (yet) worked, Romney’s (like Bush’s) would be worse.

Former President George W. Bush

Okay, you can blame me now.

Obama’s claim that Bush’s policies caused the recession resonates with American voters. Almost four years after George W. Bush left office, polls show the American people continue to blame him—more than Obama—for the recession that created today’s dismal economic conditions. Throughout the fall and in their debates, it’s a sure thing that Obama will continue to argue that Romney is just another George W. Bush.

How can Romney respond? First, the American people are not wrong about the cause of the recession. There is some truth in what Obama is saying. The housing policies pursued first by the Clinton administration and then by the Bush administration were responsible for the financial crisis and the recession that followed. This will be no surprise to Romney and other Republicans, since Romney and virtually all his primary season rivals agreed in their debates that the government’s housing policies were the cause of the financial crisis. And by that they had to mean Bush.

Beginning in the mid-1990s, under the grandiose title “The National Homeownership Strategy: Partners in the American Dream,” the Clinton administration used the “affordable housing goals” that Congress had imposed on Fannie Mae and Freddie Mac to increase the availability of mortgage credit to low-income borrowers. It also loosened the standards under the Community Reinvestment Act to pull insured depository institutions further into the low-income lending program.

At first, 30 percent of all mortgages purchased by Fannie and Freddie had to be loans made to borrowers at or below the median income in the places where they lived, but in 2000 Clinton’s HUD secretary, Andrew Cuomo, increased this quota to 50 percent. When the Bush administration took office in 2001, it had an opportunity to end this program, but it gave HUD a free hand, allowing the agency to raise the affordable housing quota to 55 percent in 2007, and doing nothing to cut back the scope of the Community Reinvestment Act.

In order to meet the growing quota for financing low-income borrowers, Fannie and Freddie had to relax their underwriting standards; that was the whole idea. By 2008, half of all mortgages—28 million loans—were subprime or otherwise low quality; of these, 74 percent were on the books of Fannie and Freddie and other government agencies or government-controlled entities. The funds that the government poured into the low-income housing market through Fannie and Freddie raised homeownership rates from 65 percent in 1995 to 69 percent in 2004, the highest rate ever recorded.

Bush took credit for this, but the huge expansion of subsidized mortgage funds also built the largest housing bubble in U.S. history. When the bubble began to deflate, it became clear why subprime mortgages had always before been a niche business—they defaulted in unprecedented numbers, driving down housing prices nationwide and weakening most major financial institutions. When Lehman Brothers failed in September 2008, a full-scale panic—the financial crisis—ensued.

Romney should not deny Bush’s error. Although Clinton began the process of forcing low mortgage underwriting standards, Bush continued and enhanced it. Instead, Romney should point out that the government should never have been in the housing finance business, and that he will eliminate Fannie and Freddie to restore a functioning housing market—something Obama has failed to do in almost four years.

But—and this is the key point—Romney can also turn the issue back on Obama, pointing out that while Bush clearly erred in his housing policies he pursued the right policies for getting the United States out of a recession, a topic far more relevant to the current election. While Obama chose vast and wasteful Keynsian-style spending—a “stimulus” of close to $800 billion—Bush chose tax cuts in the Reagan mold, just as Romney himself has now proposed.

When Bush entered office in January 2001 the United States was sliding into a recession caused by the dot-com collapse at the end of the Clinton administration. The first Bush tax cuts went into effect in June 2001 and by November 2001—even after the calamity of 9/11—the economy had emerged from recession. Government revenues grew sharply between 2004 and 2007. Between 2001 and 2004, even including the recession period, median household income rose by 1.6 percent. In the three years since the end of the last recession in June 2009—even if we don’t include the losses in household income during the recession itself—median family income under Obama has declined by 5 percent.

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