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Why The Bush Economy Really Stinks

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Message Mary Ratcliff

Well, it's finally coming: the Bush recession.

George W Bush's Ownership Society built ontop of massive debt and risky financial packages has finally come to the edge of the cliff. Back in 2004, the current housing bubble was started at the behest of Alan Greenspan and the Bush administration. In February 2004, Alan Greenspan urged people to take advantage of the low interest rates and refinance their mortgages with adjustable rate mortgages.

American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage. To the degree that households are driven by fears of payment shocks but are willing to manage their own interest rate risks, the traditional fixed-rate mortgage may be an expensive method of financing a home.

At the same time Bush touted his plan for increasing homeownership for minorities and other lower income Americans, but as this contemporaneous report says, that for the buyers, the threat was that they could be victimized by predatory lending and would be unprepared to manage the risk.

When it comes right down to it, Bush's homeownership agenda -- that heartwarming face to the "ownership society" -- has all the downsides we've come to expect from the rest of Bush's economic agenda. Based on fuzzy research and unchecked assumptions? Check. Leaves millions of low-income Americans behind? Check. Pushes risk and debt on Americans? Check. "It's the same story with homeownership as it is with any other 'ownership society' program," says Crowley. "There's a lot of potential gain to be had, but you're also asking individuals to take on a lot of risk."

Yet, rather than increase regulations, the Bush administration and Mr. Greenspan turned a blind eye while companies like Countrywide invented new and more toxic mortgage offerings to sell expensive and risky loans to those who could least afford them. There should be no question that this bubble was created by those whose primary job should have been to guide and manage the economy, rather than use it to enrich the greedy and push all the risk on those least able to manage it. And now, we are finally seeing the chickens coming home to roost.

We are truly on the brink of a recession, the magnitude not known in our country in over 60 years. What's worse, because this isn't your normal recession, the standard tools (stimulus spending or tax cuts) for addressing a recession are not up to solving the problem. (emphasis mine)

In the current downturn, something more unsettling than a traditional swing in the business cycle appears to be at work: The United States has become increasingly prone to financial bubbles -- huge, seemingly irreversible rises in the value of one sort of asset or another, followed by sudden and largely unforeseen plunges.

What makes bubbles so dangerous is that their consequences, when they burst, are wider, often more damaging, and certainly more unpredictable than those of ordinary downturns.

"We are more prone to bubbles than we used to be," said John H. Makin, a former senior Treasury official with several Republican administrations and now a scholar with the conservative American Enterprise Institute in Washington.

"The old-fashioned recession, where the consumer ran out of gas or there was an economic policy mistake, doesn't seem to occur much anymore," said Alice M. Rivlin, a former vice chair of the Federal Reserve and Clinton administration budget director. "As we've seen from recent events, bubbles seem to be playing a bigger role."

Economists such as Rivlin and Makin do not necessarily oppose traditional stimulus proposals.

"When there's a flood, I'm not against throwing in sandbags," Makin said. "It's not going to solve the problem. It's not going to reverse it. It might mitigate it."

But the overriding requirement, they say, is that economists and policymakers need to develop ways to identify potential bubbles, discourage them from growing, and limit the economic carnage if they do.

Analysts trace the economy's growing propensity to develop bubbles to an unusual chain of events. Since the early 1980s, increasingly effective Fed policymaking, coupled with financial innovations such as the expansion of credit cards, home-equity loans and exotic security derivatives, helped shrink large-scale fluctuations in the economy in what economists call the Great Moderation.

Could we have predicted this bubble? Well, I remember reading this back in 2004:

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Mary Ratcliff is a senior writer and editor at The Left Coaster and Pacific Views.
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