1) President Reagan came into office in 1980 with a four-point economic plan to reduce inflation and stimulate the economy by cutting taxes and government spending, pursuing sound monetary policy, and reducing regulation. This led to strong economic growth over the following decades.
2) However, by the 2000s the Federal Reserve had abandoned sound monetary policy and pursued easy money policies under Bush and Clinton, keeping interest rates too low for too long and contributing to a housing bubble.
3) Affordable housing policies beginning in the 1970s also pushed for lower lending standards and more subprime mortgages, exacerbating the effects when the housing bubble eventually burst in 2007-2008.
1) President Reagan came into office in 1980 with a four-point economic plan to reduce inflation and stimulate the economy by cutting taxes and government spending, pursuing sound monetary policy, and reducing regulation. This led to strong economic growth over the following decades.
2) However, by the 2000s the Federal Reserve had abandoned sound monetary policy and pursued easy money policies under Bush and Clinton, keeping interest rates too low for too long and contributing to a housing bubble.
3) Affordable housing policies beginning in the 1970s also pushed for lower lending standards and more subprime mortgages, exacerbating the effects when the housing bubble eventually burst in 2007-2008.
1) President Reagan came into office in 1980 with a four-point economic plan to reduce inflation and stimulate the economy by cutting taxes and government spending, pursuing sound monetary policy, and reducing regulation. This led to strong economic growth over the following decades.
2) However, by the 2000s the Federal Reserve had abandoned sound monetary policy and pursued easy money policies under Bush and Clinton, keeping interest rates too low for too long and contributing to a housing bubble.
3) Affordable housing policies beginning in the 1970s also pushed for lower lending standards and more subprime mortgages, exacerbating the effects when the housing bubble eventually burst in 2007-2008.
Comment Now Follow Comments Facing double digit inflation, double digit interest rates and soon to be double digit unemployment, President Reagan came into office with a four point economic program on which he had eplicitly campaigned, fundamentally changing the course of American economic policy! As discussed in my recent op" ed, #Reaganomics vs! $bamanomics% Facts and Figures,& those four points were% '! Reduce ta rates sharply to improve incentives for savings, investment, (ob creation, business start"ups and epansion, entrepreneurship and wor)! *! Cut unnecessary government spending! +! Pursue anti"inflationary monetary policy to maintain a stable dollar! ,! -eregulation to reduce costs for business and consumers and to increase efficiency! As . discussed in that article, this was the most successful economic eperiment in world history! .nflation was tamed by '/0+, never to be heard from again 1 until recently! The economy too) off on a *2"year boom, #the greatest period of wealth creation in the history of the planet,& as recounted by Art 3affer and 4teve 5oore, and &an economic Golden Age,& as rightly labeled by 4teve Forbes! 6hy did it end with the *770"*77/ financial crisis, from which we have not yet fully recovered8 9y *770, as shown below, American economic policy had departed from every one of the four plan)s of Reaganomics! Two of those blunders were especially salient% '! the 9ush cheap dollar monetary policy and *! the Clinton re"regulation to force the financial community into the subprime mortgage fiasco! Federal Reserve 9oard Chairman Alan Greenspan and other governors at the Fed eventually departed from Reagan:s in(unction that monetary policy focus on maintaining stable prices, and started trying to stimulate the economy through old ;eynesian policies of easy money! The 9ush Treasury supported that, favoring a cheap dollar in response to ubi<uitous business lobbyists in 6ashington more than willing to sacrifice the long term economy to their short term eport goals! The central role of the resulting Fed policies in causing the financial crisis was most authoritatively eplained by 4tanford =conomics Professor and monetary policy guru >ohn Taylor in his timely boo), Getting Off Track! Taylor begins% The classic eplanation of financial crises, going bac) hundreds of years, is that they are caused by ecesses 1 fre<uently monetary ecesses 1 that lead to a boom and an inevitable bust! .n the recent crisis we had a housing boom and bust, which in turn led to financial turmoil in the ?nited 4tates and other countries! . begin by showing that monetary ecesses were the main cause of the boom and the resulting bust! =conomics Professor 3awrence H! 6hite now of George 5ason ?niversity elaborates% .n the recession of *77', the Federal Reserve 4ystem@began aggressively epanding the ?!4! money supply! Aear"over"year growth in the 5"* monetary aggregate rose briefly above '7 percent, and remained above 0 percent entering the second half of *77+! The epansion was accompanied by the Fed repeatedly lowering its target for the federal funds Binterban) short termC interest rate! The federal funds rate began *77' at D!*2 percent and ended the year at '!E2 percent! .t was reduced further in *77* and *77+, in mid"*77+ reaching a record low of ' percent, where it stayed for a year! The real Fed funds rate was negative@for two and a half years! .n purchasing power terms, during that period a borrower was not paying but rather gaining in proportion to what he borrowed! =conomist 4teve Han)e has summariFed the result% This set off the mother of all li<uidity cycles and yet another massive demand bubble! From early *77' until late *77D, as 6hite further eplains, #the Fed pushed the actual federal funds rate below the estimated rate that would have been consistent with targeting a *G inflation!& That estimated rate is determined by what is )nown in economics as the Taylor Rule! 4teve Forbes adds, #.n *77,, the Federal Reserve made a fateful miscalculation! .t thought the ?!4! economy was much wea)er than it was and therefore pumped out ecess li<uidity and )ept interest rates artificially low!& 6hite continues% The demand bubble thus created went heavily into real estate! From mid"*77+ to mid"*77E, while the dollar volume of final sales of goods and services was growing at 2 percent to E percent, real estate loans at commercial ban)s were growing at '7"'E percent! Credit fueled demand pushed up the sale prices of eisting houses and encouraged the construction of new housing on undeveloped land, in both cases absorbing the increased dollar volume of mortgages! 9ecause real estate is an especially long"lived asset, its mar)et value is especially boosted by low interest rates! 4ustained below"mar)et interest rates distort huge flows of investment into housing in particular because the lower rates most favor the longest term investments! 9ut low interest rates by themselves do not mean monetary policy is ecessively loose! That depends on what mar)et prices are saying, as reflected by the dollar, gold and inflation! The Fed:s loose monetary policies during the 9ush Administration, however, also generated sharp declines in the dollar! The dollar was worth '!'2 euros near the start of *77*, but it declined by close to 27G near to 7!D =uros by the start of *770! The price of gold soared from H+27 near the end of *77* to almost H',777 by the start of *770! =ven inflation, defeated *2 years previously, started to come bac), increasing from '!22G at the end of *77', to as high as 2!DG in >uly *770! The cheap dollar monetary policy further inflated the housing bubble because it generated flight into real assets to escape the depreciating greenbac)! This also eplains why the housing crisis showed up virtually worldwide! The Fed managing the world:s reserve currency effectively eported its wea) currency policy globally! $ther countries loosen their monetary policies to avoid the negative short term trade implications of appreciating currencies relative to the dollar! 5oreover, the dollar:s wea)ness mas)s the looseness of their monetary policies, misleading them into even looser policies! 6hen the Fed finally realiFed it had to rein in its loose monetary policy, soaring housing prices slowed, flattened out and then tipped into declines! The steep decline in housing prices produced chaos throughout the financial industry in the ?!4!, and ultimately the world, as widespread financial assets based on housing collapsed in value! As Taylor concluded, #ITheJ etra"easy IFed monetaryJ policy accelerated the housing boom and thereby ultimately led to the housing bust!& 9ut that is not the whole story! Chapter * of the story is the #affordable housing& policies going bac) many years, spawned by liberals and progressives! These increasingly etreme and unbalanced policies began the housing bubble even before the Fed:s miscalculations starting in *77'! 5oreover, because of these affordable housing policies, when the bubble burst, and housing prices stopped rising and started deep declines, the resulting damage was far worse! .n the early '//7s, these liberalKleft activists began using the Community Reinvestment Act and anti"discrimination housing laws to allege discrimination against housing lenders who maintained traditional lending standards that ecluded borrowers who were not creditworthy! Their demands reached the point of insisting that lenders discount bad credit history, no credit history, no savings, lac) of steady employment, a high ratio of mortgage obligations to income, undocumented income and inability to finance downpayment and closing costs, while counting welfare and even unemployment benefits as income in <ualifying for a mortgage! These unreasoned demands were imposed on financial institutions through overregulation, as H?- and >ustice began threatening and even following through on discrimination suits, and ban) regulators began downgrading institutions that refused to )nuc)le under! 9ut the big brea)through came when President Clinton got on board with what was effectively an official national policy of looting the ban)s! As 4tanley ;urtF eplained for National Review% #Finally, in >une of '//2, President Clinton, Lice"President Gore and 4ecretary Cisneros announced the administration:s comprehensive new strategy for raising home"ownership in America to an all"time home high! Representatives from AC$RM were guests of honor at the ceremony! .n his remar)s, Clinton emphasiFed that% #$ur homeownership strategy will not cost the tapayers one etra cent! .t will not re<uire legislation!& Clinton meant that informal partnerships between Fannie and Freddie and groups li)e AC$RM would ma)e mortgages available to customers #who have historically been ecluded from homeownership!& .n the end, of course, Clinton:s plan cost tapayers an almost unbelievable amount of money!& Clinton epanded the looting to Fannie 5ae and Freddie 5ac, forcing them through regulatory fiat to massively increase funds for subprime mortgages through their securitiFation practices! That securitiFation further spread severe damage once the housing bubble popped throughout the entire ?!4! financial community, and beyond to financial institutions globally The big problem wasn:t caused (ust by loans to low income borrowers! The problem was that once lending standards were trashed for these borrowers, they couldn:t be maintained for more creditworthy borrowers! This let more well" heeled speculators in on the scam, now able to <ualify for highly speculative mortgages they could not have <ualified for previously! That vastly epanded the resulting credit ris) vulnerabilities for the financial system, and vastly pumped up the housing bubble far more! $ther regulatory blunders further contributed to the damage caused by the ultimately inevitable collapse of the artificial housing bubble! These included ill"considered #mar)"to"mar)et& accounting re<uirements, and regulatory favoritism for an oligopoly of corrupted credit rating agencies! The panic)y, incoherent bailout policies led by 9ush Treasury 4ecretary Henry Paulson only further contributed to the crisis, further panic)ing the ?!4! and world economies! Conse<uently, the real cause of the financial crisis is that by *770, President Clinton, President 9ush and Republicans and -emocrats in Congress had departed from every one of the four plan)s of Reaganomics that produced the *2"year economic boom! 9ush:s Fed had trashed Reagan:s monetary policy! Clinton:s overregulation produced the subprime mortgage fiasco! 5oreover, during 9ush:s presidency Congress lost control of spending, with federal spending rising by one seventh as a percent of G-P, reversing the gains that had been made under the Gingrich Republican ma(orities in the '//7s! Then, as the recession gained steam in *770, instead of responding with Reagan style supply side rate cuts to restart growth, President 9ush cut a deal with the -emocratic Congress in February, *770 for a thoroughly forgettable ;eynesian stimulus pac)age, which predictably failed to produce any positive effect! 6orse, it provided the foundation for President $bama:s far more egregious ;eynesian travesties, which have also thoroughly failed yet again! How then to restore booming growth should be obvious! Restore each of the four plan)s of Reaganomics! How to do that will be discussed in my column for net wee)! Peter Ferrara is Director of Policy for the Carleson Center for Public Policy and Senior Fellow for ntitle!ent and "udget Policy at the #eartland $nstitute% #e served in the &hite #ouse Office of Policy Develo'!ent under President Reagan( and as )ssociate De'uty )ttorney General of the *nited States under the first President "ush% #e is the author of America:s Tic)ing 9an)ruptcy 9omb( forthco!ing fro! #ar'erCollins( which discusses the causes of the financial crisis and how to restore boo!ing growth in !ore detail%