[Congressional Record Volume 157, Number 139 (Monday, September 19, 2011)]
[Senate]
[Pages S5711-S5712]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
GLOBAL FINANCIAL CRISIS
Mr. KYL. This month marks the third anniversary of the Federal
seizure of Fannie Mae and Freddie Mac, the collapse of Lehman Brothers,
the bailout of AIG, and other events that marked a turning point in the
global financial crisis.
At the time, many journalists, pundits, and policymakers were eager
to interpret the crisis as a failure of capitalism, as some called it,
or a failure of free markets. There was a famous Newsweek cover that
said, ``We're All Socialists Now.''
This interpretation is fundamentally flawed, and I wish to speak a
little bit about that. Blaming capitalism and free markets and
deregulation for causing the crisis that occurred 3 years ago does not
tell the real story. We must remember that misguided government
policies played a big role in pumping up the housing bubble, and they
have subsequently played a big role in delaying our recovery from this
crash. So I wish to briefly discuss the findings of several economists
who highlight these points.
Loose monetary policy was one such misguided policy that fueled the
crisis. Writing recently in the quarterly journal, National Affairs,
Stanford economist John Taylor pointed out that U.S. monetary policy
became highly discretionary in the years leading up to the 2008 crisis,
whereas monetary policy had been more rules-based during the previous
two decades. Taylor has determined:
The low interest rates set by the Federal Reserve from 2003
to 2005 added fuel to the housing boom and led to risk-taking
and eventually a sharp increase in delinquencies and
foreclosures and in the toxic assets held by financial
institutions. A more rules-based Federal funds rate--
particularly one that held to the general approach that
characterized Fed decisions throughout the 1980s and '90s--
would have prevented much of the boom and bust that followed.
This, according to economist John Taylor. In other words, with
tighter, more prudent monetary policy, the housing bubble would have
been significantly smaller.
Another major cause of the bubble was Federal housing policy,
especially the reckless mortgage activities of government-sponsored
enterprises Fannie Mae and Freddie Mac. These two institutions,
operating under an implicit government guarantee, played a central role
in the housing bubble. The government's guarantee permitted them to
operate without adequate capital, to assume more risk than competing
financial institutions, and to borrow at a below-market rate of
interest. Between 2004 and 2007, Fannie and Freddie became the largest
buyers of so-called subprime and Alt-A mortgages.
As Columbia Business School economist Charles Calomiris has observed:
Logic and historical experience suggest that even in the
presence of loose monetary policy and global imbalances, if
the U.S. government had not been playing the role of risky-
mortgage purchaser in the years leading up to the crisis,
mortgage-related losses would have been cut by more than
half.
To be sure, government entities were not the only institutions
promoting the growth of nontraditional mortgages. But government policy
was the critical factor that made the bubble so dangerously large.
Housing-finance expert Peter Wallison of the American Enterprise
Institute argues that:
Without the huge number of defaults that arose out of the
U.S. housing policy, defaults among the mortgages in the
private market would not have caused a financial crisis.
So with better, more responsible Federal housing policies, the crisis
might have been avoided or have been less severe.
Government failures have also, in the words of Nobel Prize-winning
economist Gary Becker, ``prolonged the crisis.'' Indeed, the economy
has not responded well to the prodigious spending, trillions in debt,
and countless new regulations imposed during the Obama
administration. The economic policies of the last few years seem to
have hampered the confidence of job creators, while creating widespread
uncertainty and undermining confidence.
Michael Boskin of Stanford, in a piece entitled ``The Obama
Presidency by Numbers,'' said this:
President Obama's debt explosion will be a drag on the
economy for years to come. . . . The share of Americans
paying income taxes is the lowest in the modern era, while
dependency on government is the highest in U.S. history.
These are dreary findings.
In January 2009, the U.S. unemployment rate stood at 7.6 percent. By
October 2009, it had surged above 10 percent despite the passage of the
$1.2 trillion stimulus bill. Unemployment has been above 9 percent for
26 of the 30 months since the passage of the stimulus. In fact, Boskin
has found that even by the administration's inflated estimates of jobs
``created or saved'' by the stimulus, each job has cost $280,000--each
job, $280,000. That is five times the average American's annual pay.
Remember, that is borrowed money that will eventually have to be taken
out of the private sector to pay it back.
In addition to the failed stimulus package, the last Congress also
enacted a pair of 2,000-page bills that were supposedly designed to
repair the health care and financial systems. In the view of Becker,
``These laws and the continuing calls for additional regulations and
taxes have broadened the uncertainty about the economic environment
facing businesses and consumers. This uncertainty decreased the
incentives to invest in long-lived producer and consumer goods.
Particularly discouraged was the creation of small businesses, which
are a major source of new hires.''
My point is not to needlessly pile on President Obama but to
underline the need for a new approach. His policies have made things
worse, and the uncertainty surrounding his new proposals has crippled
America's economic recovery. As Carnegie Mellon economist Allan Meltzer
has written, ``High uncertainty is the enemy of investment and
growth.''
America's job creators are eager to know whether their taxes will be
raised at the end of 2012, whether the new health care law will force
them to lay off a substantial number of workers, whether the Dodd-Frank
bill will impose unforeseen new costs, and whether the administration
will impose even more regulatory hurdles. Notably, despite the
administration's recent rhetoric about regulatory review, the massive
new regulations in its two signature bills--health care and financial
regulatory reform--will not be reconsidered.
In conclusion, the 2008 financial crisis was not simply a failure of
capitalism or a result of free market economic policies. We can
reasonably say the crisis would not have been nearly as severe or may
even have been avoided entirely without misguided government policies.
All of us here would like to see a strong economic recovery, but
reckless spending, debt, more regulation, and government intervention
have not boosted the economy so far. It is time for another approach,
one that eschews the top-down Washington management and focuses on
creating incentives and long-term certainty in the private sector.
Mr. President, I suggest the absence of a quorum.
The ACTING PRESIDENT pro tempore. The clerk will call the roll.
The assistant legislative clerk proceeded to call the roll.
The ACTING PRESIDENT pro tempore. The Senator from West Virginia.
Mr. ROCKEFELLER. Mr. President, I ask unanimous consent that the
order for the quorum call be rescinded.
The ACTING PRESIDENT pro tempore. Without objection, it is so
ordered.
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