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What/Who Caused the Economy to Tank (for everyone except big corporations & the rich)?

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A quick review, and a discussion to follow

The Bush Tax Cuts and War Costs Did Lasting Harm   


Figure 1 by cbpp.org

Some commentators blame recent legislation -- the stimulus bill and the financial rescues of the big banks etc. -- for today's record deficits.     Yet those costs pale in comparison to the costs of tax cuts (for the rich) and war, which have greatly swollen our deficits. The policies behind these costs may be less conspicuous now, because many were enacted years ago and they have long since been absorbed into the budget projections of the Congressional Budget Office (CBO) and other organizations, but they are still of primary importance if we are to accurately and truthfully assess blame for the current state of our economy (as it is experienced by most Americans).

It is important to realize that just two policies dating from the Bush Administration -- tax cuts for the rich and the wars in Iraq and Afghanistan -- accounted for over $500 billion of the deficit in 2009 and will account for almost $7 trillion in deficits between 2009 and 2019, if the associated debt-service costs are included, as they certainly must be.  

In addition, the prescription drug benefit  enacted   in 2003 accounts for further substantial increases in deficits and debt.    

These impacts easily dwarf the stimulus and financial rescues attempted by the Obama administration  

Unlike the temporary costs of these rescue attempts, the policies inherited from the previous (Bush) administration (the tax cuts, war costs, and drug benefits) do not fade away as the economy recovers.     Therefore, without the economic downturn stemming from the mortgage meltdown, war costs, and the fiscal policies of the previous administration, the budget would be roughly in balance over the next decade.     That would have put this nation on a much sounder footing to address the demographic challenges and the cost pressures in health care that now darken the long-run fiscal outlook.  

( Source article)

The mortgage meltdown as a contributor to the tanking of the economy

The stability and safety of mortgage-related assets were and are ostensibly monitored by private credit rating companies.     The three top firms are Moody's, Standard & Poor's, and Fitch.     Each is and was supposed to issue independent, objective analysis on the financial soundness of mortgages and other debt traded on Wall Street.     Millions of investors relied on these analyses in deciding whether to invest in debt instruments like mortgage-backed securities (MBSs).  

However, as home prices skyrocketed from 2004 to 2007, each agency issued the highest quality ratings on billions of dollars of what is now unambiguously recognized as low-quality debt, including subprime-related mortgage-backed securities (MBSs).  

As a result, millions of investors lost billions of dollars after purchasing (directly or through investment funds) highly rated MBSs that were, in reality, low quality, high risk and prone to default.     The phenomenal losses that followed had many wondering how the credit rating firms could have gotten it so wrong.     The answer lies in what might euphemistically be called the "cozy relationship' between the rating companies and the financial institutions whose mortgage assets they rate.     Specifically, financial institutions that issue mortgage and other debt had been paying off the three ratings firms .   . in order to get good credit ratings!   In effect, the "referees" were being paid off by the "players."

Bottom line:   when home prices reached their peak, and then began their fall, and kept falling, billions of dollars were lost by those who invested in MBSs -- and these investors included a great number of big banks, pension funds, and various kinds of institutions all over the world, as well as private individuals.     Millions of people collectively lost trillions of dollars, which were in a very real sense siphoned off to the very rich, and those who became very rich, who bet against the millions of "fools' who invested in these near-worthless MBSs that were comprised of, or based on, sub-prime loans masquerading as good sound loans.     The result of all this was that our economy suffered accordingly, in a very major way, as consumer purchasing (which is responsible for two-thirds of all purchasing) began to dry up, as the "fools' realized that they had just taken an enormous financial loss.   As home prices continued to fall, a point was eventually reached where one out of every four homes could no longer be sold for enough to allow the "owner' to pay off the mortgage.  

Would any of this have happened without the Republican-initiated elimination of the Glass Steagall (protection) Act, and the total neglect by the regulators at the Fed and elsewhere, who should have been monitoring and putting a stop to all this?   No.  

(Source article)

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Several years after receiving my M.A. in social science (interdisciplinary studies) I was an instructor at S.F. State University for a year, but then went back to designing automated machinery, and then tech writing, in Silicon Valley. I've (more...)
 

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The members of the congressional deficit committee... by Richard Clark on Wednesday, Sep 21, 2011 at 11:22:33 AM
Wall St. and our corrupt government caused the col... by Patricia Gray on Wednesday, Sep 21, 2011 at 2:02:42 PM
"Bastards" fits perfectly, Patricia --  good ... by Ernie Messerschmidt on Thursday, Sep 22, 2011 at 9:00:09 PM
As chairman of the Senate Banking Committee, Repub... by Ron Brassfield on Saturday, Oct 1, 2011 at 4:48:56 PM
Quick review paragraph:   As most reade... by Richard Clark on Wednesday, Sep 21, 2011 at 4:24:45 PM
Back in 1982 someone saw some very ominous signs o... by E. J. N. on Wednesday, Sep 21, 2011 at 7:03:53 PM
Austrian economists provided ample warning to... by Richard Clark on Wednesday, Sep 21, 2011 at 8:49:38 PM
I am half way through with it and already sent an ... by Mike Preston on Wednesday, Sep 21, 2011 at 10:14:47 PM
...the link to "Inside Job," which until today, I ... by JimZ on Thursday, Sep 22, 2011 at 3:49:58 PM
It serves as a simplified model of what happe... by Richard Clark on Thursday, Sep 22, 2011 at 4:25:08 PM
...I have sent the link to my students, which fits... by JimZ on Friday, Sep 23, 2011 at 11:18:50 AM
Meltdown - The men who crashed the world AlJaze... by Mike Preston on Thursday, Sep 22, 2011 at 9:37:13 PM
The global economic crisis of 2008 cost tens o... by Richard Clark on Friday, Sep 23, 2011 at 11:18:35 AM
The banksters must be jailed if not otherwise ... by Richard Clark on Sunday, Sep 25, 2011 at 11:19:44 AM
..., as I have suspected for decades, unfortunatel... by Ron Brassfield on Saturday, Oct 1, 2011 at 5:02:43 PM