[Congressional Record (Bound Edition), Volume 157 (2011), Part 10]
[Senate]
[Page 13800]
[From the U.S. 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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