06/17/2012 09:10 pm ET | Updated Aug 17, 2012

It's All Bush's Fault

Since assuming office three and a half years ago, President Barack Obama has recited a constant mantra: He inherited a mess and it is all George Bush's fault. That he inherited a mess is indisputable, but so memorably did presidents Franklin Roosevelt and Ronald Reagan. Neither Roosevelt nor Reagan, however, expended political capital blaming their predecessors; neither did they seek to dramatize the difficulties facing the country. Instead they assured their fellow citizens that we "have nothing to fear but fear itself," and "our best days are ahead." Each developed and implemented contrasting programs -- one "Keynesian" favoring expanding government, the other "supply side" stimulating the private sector. Both were rewarded with landslide reelection victories.

Since President Obama seems to justify his reelection based on comparison with George Bush's "failed policies," inquiring minds might want to know exactly where George Bush went wrong and how President Obama has instead paved the way to prosperity.

The so called "great recession" resulted from a liquidity crisis centered in the housing sector that threatened the solvency of our largest financial institutions. Cheered on by investment and commercial banks, and federally sponsored NGOs like Fannie Mae and Freddie Mac, the country and indeed the world abandoned all pretense of fiscal prudence and inflated a bubble of housing speculation that burst in late 2008 pushing the country into a sharp but relatively short recession, followed by an historically long and shallow recovery.

Exactly how did the policies of George Bush cause such financial carnage? Did he create the regulatory regime or institutional structures that led to this orgy of speculation? The repeal of the Glass-Steagall Act that deregulated commercial and investment banks allowing them to act as principals and make and sponsor speculative investments like mortgage backed securities, was instituted by Bush's predecessor, President Clinton (with strong bi-partisan support). Did Bush perhaps institute the disastrous federal policies to abandon traditional underwriting standards and encourage and expand home ownership through promotion of Fannie Mae and Freddie Mac? Those policies had been established decades before Bush's presidency and were most notably championed by two powerful congressional committee chairmen -- Democratic Representative Barney Frank and Senator Chris Dodd. Bush did not succeed in reigning in these institutions to be sure, but it is evident that neither he nor anyone else had the political power to do so (until of course the house of cards collapsed). If anyone had the power and responsibility to exercise control over the commercial banks and thereby limit the carnage, it was the Federal Reserve that by statute operates independent of both the president and Congress irrespective of party.

George Bush did not remotely cause nor even materially contribute to the policies and structures producing the housing crisis. He is, however, responsible for three consequential actions that had significant fiscal impact: sponsoring the 2001 tax cuts, prosecuting the wars in Afghanistan and Iraq, and continuing unabated the growth rate of federal spending. While anyone can take issue with the wisdom of any of these, none were proximate causes of recession. The tax cuts were expansionary. Indeed President Obama ultimately extended Bush's cuts as an "anti-recession" measure. Although he now proposes to eliminate the cuts for those with incomes over $250,000 in the name of "fairness" (and arguably to gain partisan advantage in an election year), even Obama could not argue that repealing these cuts would be stimulative. The two wars may not have been wise foreign policy but inarguably they were also fiscally stimulative -- much like World War II which is largely credited with moving the U.S. out of the Great Depression. Similarly Bush's failure to reign in government spending also was stimulative policy. President Obama in turn instituted an unprecedented $800 billion special expansion of government and is proposing even more spending to counter a possible future lapse into recession. President Obama and much quoted economist/political partisan Paul Krugman tell us increased government spending is absolutely necessary to grow the economy. If it would do this for Obama, why would it lead to economic contraction under President Bush?

Neither President Roosevelt nor President Reagan needed do much to convince the American people to grant them four more years. Whether Keynesian or Supply Sider, they were leaders who succeeded in changing the economic psychology of the country infusing investors and consumers with confidence and a sense of optimism.

Continuing to use George Bush as a scapegoat while largely continuing his policies doesn't seem a particularly prudent strategy for President Obama. Having failed to change public perception that we are on the wrong track, if the best President Obama can do is blame his predecessor and make excuses, he is in far greater trouble than the U.S. economy.

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