Today's economic malaise in the United States is a late chapter in a book that started with the housing bubble of the decade that preceded the fall of 2008. Was this caused by one political party or another? This is an important question, if one intends to adopt intelligent policies to deal with the bust that followed the bubble.
Admittedly, the government's pro-home-ownership policies enacted into law over the years in bi-partisan fashion helped exacerbate the home ownership boom. But, would there have been no housing boom without Fannie and Freddie and favorable tax treatment of housing? The boom might not have reached such extremes without government policy, but the bubble itself probably would have occurred anyway. Bubbles are part of life. They have happened and they will continue to happen.
When you are in a bubble, you never realize it. Instead, it seems that you are doing something intelligent, something everyone ought to do. Bubbles always have that 'bandwagon' feel and, along the way, they are exhilarating. Good things happen. Wealth increases, optimism surges, everyone's a winner! It never seems wrong, when you are cruising along in a bubble. "This time it's different."
But, it never is. Inevitably extreme optimism begins to have self doubts and eventually the crash comes and disaster. Did someone cause the disaster? Was it greed? Did some evil people running banks and other financial institutions do the damage? The answer is no. When bubbles unwind, you get crashes. This is not the result of bad guys doing bad things, although one can always find bad guys doing bad things. But, they are largely irrelevant. Bubbles and crashes can occur without bad guys doing bad things. This is a lesson that the citizenry needs to understand. Politicians will never get it, because they are incented to blame the other political party for whatever goes wrong. That won't change.
Left to themselves, crashes end quickly and very strong, vibrant economic recoveries ensue.....unless, policies are enacted to punish bad guys and "reform" something. Such "reform" policies are always misguided and always serve to abort the vigorous economic recovery that would naturally occur during their absence. We are in such a period. The combination of TARP, the stimulus bill, Dodd-Frank, Obamacare, the new EPA attitude, Bernanke's monetary policies, and the regulatory climate have all served to retard any real hope of true economic recovery.
These kind of policies caused the Great Depression to be Great. The depression that began in 1929 never entered a sustained recovery until government policies began to be rolled back in the late 1930s as the country began to mobilize for the coming war, by lifting restrictions on the private sector. Ten years of economic depression was the price that Americans paid for foolish policies in the 1930s. Now eight decades later, we are seeing that nothing was learned. The 1980s are a textbook case of how to recover from an economic collapse, but no one is following that successful playbook.
Economic recovery begins when businesses regain their optimism. That will never happen as long as government policy is driven by a need to see businesses as evil and businessmen as greedy and to focus on transferring wealth instead of creating it. The government needs to get out of the way. As long as the heavy hand of government maintains its chokehold on free enterprise, there will be no real economic recovery and America will continue down the European pathway. We need fewer regulations not more; we need more private commercial lending not less; we need less government workers not more; we need lower taxes, not higher. And we need to make it a matter of government policy that no business or bank is too big to fail. Let them fail. Let equity and bondholders take their punishment and leave taxpayers out of it.
The current debate about who caused what is a silly debate. Booms and busts are an essential part of free enterprise. Killing off booms and busts will kill off free enterprise. The result of reform and economic stimulus will continue to be economic stagnation. Bring back the boom!