As America and Congress continue to squabble over who is to blame for the current financial crisis, a closer and more balanced analysis of the situation reveals that there is plenty of blame to go around. It is not just Democrats or just Republicans to blame. It is all of the above. The current crisis as it exists now is twofold, a stagnant economy with national unemployment lingering at 9.1% and a mounting national debt that is ballooning out of control. The obvious question becomes how can we solve one problem without affecting the other? How can we cut spending without also affecting jobs? How can we hope to pay off the debt without raising taxes? These are not easy questions to answer and the solution will inevitably require everyone to sacrifice in some way, shape or form.
The jobs crisis we currently have is of course a direct result of the recession caused by the mortgage crisis. Lending companies like Fannie Mae and Freddie Mac were giving out sub-prime and adjustable rate mortgage loans to people who otherwise could not afford it. These loans were essentially interest deferred so that people would end up paying more than the house was worth assuming that the market value of the house would continue to increase. So basically the idea is; we give you free money in the form of an interest deferred loan and than when the market value goes above the amount of the loan you can sell your house at a profit. These lenders than packaged these loans and sold them to other banks as mortgaged backed securities to be traded on the stock market. So now as long as the housing market continued to go up people could now invest their money–or should I say gamble their money–on whether other people will be able to pay their mortgages. What could possibly go wrong, right? Well as we all know the real estate bubble burst when more houses were built than could possibly be sold at the prices builders and sellers expected.
We would be remiss to ignore the government’s role in this crisis however. Ever since the 1930’s the government has taken an active role in housing policy with many programs designed to encourage housing and home ownership. Fannie began as a government agency in 1938 and Freddie was established in 1970. These companies were later privatized but were still given a line of credit with the U.S. treasury and special tax and regulatory advantages. Than in 1977 Congress under President Carter passed the Community Reinvestment Act which in the name of nondiscrimination required banks to reduce their lending standards to extend more loans to those who were previously ineligible. These measures were further extended in 1997 by amendments to the Fair Housing Act passed by Congress and Bill Clinton, which provided incentives for self testing by lenders for discrimination.
Further legislation passed by Bill Clinton and the democrats also increased Fannie and Freddie’s line of credit with the U.S. treasury by billions of dollars resulting in more housing loans. President George W. Bush continued this practice topping on a few more billion in credit. President Bush also dismantled a congressional committee that was investigating the lending practices of Fannie and Freddie during his time in office. These government measures combined with the actions of the Federal Reserve of manipulating interest rates and printing more money created an unsustainable housing boom. So where Bill Clinton and the democrats may have ignited the fire, President Bush threw more gasoline on it and ignored the opportunity to put it out.
All of this continued government funded lending of course contributed to the national debt among other things. President George W. Bush made matters worse when he decided cut taxes for the richest Americans while borrowing money to pay for two wars. Of the 9 trillion dollars in government spending that has taken place over the past 10 years approximately 27% of it can be attributed to borrowed money to pay for government obligations (like government employees and entitlement programs) to compensate for the lack of tax revenue from the Bush tax cuts. 23% of it can be attributed to accumulated interest, 22% on the wars in Iraq and Afghanistan, 13% on the economic stimulus package under President Obama, 7% on the tax cut compromise/unemployment extension agreement between Obama and the Republicans, 5% on the 2008 financial industry bailout of 2008 and 3% on the creation of the 2003 drug benefit plan.
Three things seem to be clear based on this information. First, tax cuts to the wealthiest Americans does not produce job growth that trickles down to the rest of us or else there would be sufficient tax revenue from the jobs created, offset the resulting 27% of the debt. Secondly, the corporate bailouts under president Bush as well as the stimulus package under President Obama have done little to create significant job growth to lift us out of the recession but rather has provided temporary relief from economic collapse. Third, we cannot afford to fund costly wars that are waged preemptively based on a false suspicion of danger. We cannot afford to sacrifice the lives of our men and women in uniform for wars with changing objectives just to expand our military and capitalist influence.
So who is to blame for all of this? The Democrats? The Republicans? The Federal Reserve? The banks and financial institutions? The answer is yes, yes, yes and yes. The current financial crisis is a bipartisan creation which requires a bipartisan solution. And ultimately, we will not be able to dig ourselves out of this hole until congressional leaders accept this fact and work together to find that solution. More importantly, however, we as a nation need to reprioritize. We cannot afford to be a welfare state and a military imperialist nation. We cannot afford to police the world and meet all of the needs of our citizens at the same time. Time has shown this to be unsustainable. At some point we as a nation must make a fundamental choice between welfare and warfare.