From Bush to Obama

Written by Andrew Szabo
Thursday, 10 February 2011 00:00

In the financial panic beginning in 2007, the United States faced the most serious financial contagion since the Great Crash of 1929. The administration of George W. Bush must bear responsibility in part for helping to precipitate the great crisis we are now slowly climbing out of. Four areas of responsibility stand out. First, the decision by the SEC in 2004 to waive the “net capital rule” for the largest broker-dealers, subsequent to which some dealers such as Bear Stearns, Lehman Brothers and Goldman Sachs leveraged themselves up to an unprecedented degree. Second, a failure to rein in federal spending in relation to the across-the-board tax cut legislation of 2001 and 2006. Third, a policy of easy regulation of financial institutions, which ultimately was not consistent with the risk born by our government under FDIC deposit guarantees and federal agency backing of mortgage-backed securities. Fourth, a failure to recognize the gravity of the subprime lending fiasco and its economic impact until it was spinning out of control.

Ultimately, in the face of financial meltdown, the Bush Administration set all ideology aside and used government powers in novel and radical ways. These included the federal interventions in the Bear Stearns and AIG matters; the placing of Fannie Mae and Freddie Mac under receivership; the implementation of the TARP plan to stabilize financial institutions and help clean up their balance sheets, with $700 billion allocated to buy bad bank assets; and federal bridge loans to General Motors and Chrysler Corporation. It is still unclear why the government decided to stabilize Bear Stearns but allow Lehman Brothers to fail, a fateful decision that led to much graver and more far-reaching repercussions than anticipated. Arguably, either we should have let both perish, under a bracing free market justification, or instead rescued and reorganized both.

President Obama reappointed Ben Bernanke as Fed Chairman, and under his leadership, Fed policy has remained extremely stimulative and interventionist. President Obama’s Treasury nominee, Timothy Geithner, continued and expanded large-scale federal stimulus and bailouts. In March of 2008, the Obama Administration made additional support available to the troubled car makers and also initiated the dubious “Cash for Clunkers” auto exchange. In February of 2009, Obama signed legislation implementing $787 billion of additional stimulus spending, focused on infrastructure, education, unemployment assistance and energy-related tax incentives.

President Obama used up enormous political capital in his first two years in office to enact the Health Care Reform Act. The result was disappointing. The legislation, however noble in purpose, and despite its response to a genuine social and moral dilemma, failed to change in any significant way the economic incentives that drive health care consumption in this country. It’s hard to envision how the vast savings in costs touted for the law will be realized. I strongly doubt this claim.

Chastened by the “shellacking” taken by Democrats in the 2010 mid-term elections, Obama has acted recently with more regard to Republican views in his second term, notably by supporting extension of the Bush Tax Cuts for two years. It must be said in favor of President Obama, who seems collegial by nature, that the Republicans have followed a policy of uncompromising recalcitrance.

Despite the huge spending initiatives of the Obama Administration, the unemployment rate stubbornly remains around 10%. However, the US technically emerged from recession at the end of 2009, and the great rally in US stocks that we have experienced starting around May 2009 suggest that investors expect more robust expansion ahead. The jury is still out on President Obama’s economic policies, but it is likely that the economic climate as we approach the 2012 presidential election will be more favorable to the Democratic Party than that of the 2010 doldrums.

Next: Conclusion — Which party will claim the middle path?

Andrew Szabo is managing director of Greenwich Financial Management Inc. Write to This e-mail address is being protected from spambots. You need JavaScript enabled to view it .