01 January 2022

How Faith in an Invisible Hand has Made Republican Policies So Dangerous (And Made Biden the 21st Century Economic Repairman)

Caption for picture of regulators with chainsaw and bolt cutters from Jonathan Levy's brilliant Ages of American Capitalism.

"Increased residential mortgage lending was one route to President George W. Bush's promised 'ownership society.' Here, a number of federal regulators and banking representatives take a chain saw and pruning shears to the 'red tape' of government-lending regulations. Lax government oversight contributed to fraudulent lending practices during the 2000s."

How did the gospel of deregulation lead to the Great Recession?

As wages stagnated in the early 2000s, people tapped their homes for loans they used to maintain consumption. This was lightly regulated, lenders assuming that even if borrowers income didn't rise enough to pay the loans, the home prices would rise enough to cover the debt. Lenders bundled home loans as MBSs, mortgage backed securities. Between 2003 and 2007, there were $4 trillion in new MBSs. Then investors leveraged those into CDO (collateralized debt obligation), selling these on largely unregulated markets. Finally, these CDOs were leveraged into CDS - an insurance contract that paid out if the CDO defaulted. CDS were built on CDOs that were built on MBSs that were built atop actual home loans taken out by Americans whose incomes weren't going up but whose home values were.
How precarious were those CDSs at the top of the pyramid resting on the bet of steadily rising home prices? "Between 2004 and 2007, the value of CDS-referenced assets in the world increased from $6.4 billion to $58.2 trillion."

That's trillion. How much is $58 trillion in debt obligation? Global GDP in 2007 was $58 trillion. One type of debt was allowed to spiral into a paper value equal to the world's total GDP.

The crash was spectacular. By the time Obama took office, median household wealth in the US had crashed back to where it had been (adjusted for inflation) in 1969. All the gains during the presidencies of Nixon, Carter, Reagan, Bush 1, Clinton, and Bush 2 erased.

Gains in wealth, income, and jobs are not random. They flow from policy, from a collaboration of private and public sector initiatives.

In his final months in office, when Trump paid little attention to the pandemic that was killing more Americans daily than 9-11 had and instead obsessed over trying to invalidate the election, he essentially left COVID relief initiatives to states. At this point in the pandemic, there was little distinction between quelling the pandemic and reviving the economy. Economic policy was health policy but still he largely downplayed the risks of COVID. For him, the love of unregulated responses neatly aligned with his disdain for management responsibility. Bush's affection for deregulation led to a freefall in capital markets. Trump's affection for management neglect (its own kind of faith in the notion that government interventions were worse than no interventions) led to a freefall in labor markets. Trump is the first president since Herbert Hoover to preside over a drop in the number of Americans employed.

As he came into office nearly a year ago, Biden once again (as when he served as VP under Obama) was tasked with cleaning up a mess left behind by a Republican presidency's disastrous policies. The differences in the performance of capital and labor markets is not random.

Since the start of Carter's presidency, job creation rates under Democratic presidencies has run at 6.5X what it has under Republican presidencies; stock market returns are 3X higher. It might just be that no invisible hand is going to save your economy.

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