January 1, 2020 — This is the story of how the United States, in a lost decade, reaped the results of wretched excess and risk-taking in its public and private sectors and how, now, we can face the future with optimism.
Looking back now, in 2020, with 2020 hindsight as it were, it is easy to see how it all happened. But few saw it coming. Those who did were scorned as dinosaurs who did not understand that the new economy, unfettered by New Deal-era regulation, could bring unparalleled riches to all who would play the game. Thinking changed at the start of the decade just passed, however. The financial/economic crisis of 2008-10 hit most Americans hard. Wrenching 2010 mid-term congressional elections expressed voter anger and focused the attention of elected officials. But it took most of the years between then and now to pull us out of the trough.
In the financial community, optimism prevailed at the start of the 21st century. The last real financial/economic squeeze, after all, had come in the wake of the hapless Jimmy Carter presidency when Federal Reserve Chair Paul Volcker had attacked high inflation and interest rates with old-time-religion strategies, which had with some pain squeezed out excesses. After that, risk and speculation became the apparent Stairway to Heaven.
In the 1990s and, at the turn of the 21st century, financial houses invented new investment instruments and derivatives that they themselves did not understand. They took on levels of risk that imperiled the general financial system. So-called hedge funds, generally unregulated, took big positions in these exotic markets. They were investing not only on behalf of wealthy individuals, willing to take risk, but were investing as well on behalf of banks, pension funds, endowments, and other institutions that normally would be expected to pursue more careful strategies. Ordinary citizens' money thus was put at risk of which they were unaware.
All of this was facilitated by lax regulatory policy and an enabling Federal Reserve whose chairman, Alan Greenspan, an Ayn Rand devotee, declared that he did not want to dampen "the animal spirits" (i.e., the will to greed) of the financial players who were behind a growing bubble. Wall Street and banking-executive arrogance grew. Their compensation and bonuses reached obscene levels.
A perfect storm built up in the housing sector. Mortgages were written for people who could not afford what they were buying. Why not write a 125 percent mortgage for an unqualified buyer? After all, home prices were rising inexorably and, presumably, permanently. The writers of the mortgages did not hold them for more than a split second. Instead, they were sold to other institutions which packaged them and sold them to yet other institutions, overseas as well as domestically. No one noticed that, in many cases, the packages' underlying real value was close to zero.
President Bill Clinton produced a balanced federal budget in a growing economy generating ample tax revenues. But, at the same time, he yielded to devotees of financial "deregulation" inside and outside his administration and unknowingly encouraged the same animal spirits so exalted by Greenspan. He helped open the casino.
There were also long-building trends in the public sector, and in the politics that drive the public sector, that had preceded the financial speculation and which contributed as well to the lost decade through which we have just passed.
President Lyndon Johnson's one-sided 1964 electoral victory over Barry Goldwater, and the election of heavy Democratic majorities in both houses of Congress, preceded the enactment in 1965 of legislation establishing Medicare, Medicaid, federal aid to education, and other Great Society measures. The Civil Rights Act had been enacted the previous year. The Voting Rights Act was part of the 1965 post-landslide legislation.
All of these were positive and long-needed programs. But, with their enactment, the roles of government and the private sector were substantially rebalanced. Moreover, Johnson knew that already existing Social Security programs, as well as Medicare and Medicaid, would expand year by year. He saw himself as completing his hero Franklin Roosevelt's New Deal. Those ambitions were temporarily checked, however, as Vietnam War expenditures led to federal deficits and crowded out domestic spending.
Voters supported the changes but many considered them excessive. Democrats lost in 1966 some of the congressional seats they had gained in 1964. Post-election polling after Nixon's narrow 1968 victory over Humphrey showed that huge numbers of traditional blue-collar and middle-income Democrats had defected either to Nixon or to third-party candidate George Wallace. Survey data indicated it was not the Vietnam War that caused their shift; instead, it was their general belief that the Johnson-Humphrey years had moved too fast, too soon with Great Society initiatives and spending.
The trend intensified in 1972, as Nixon was reelected in a landslide over George McGovern. Far larger numbers of normally Democratic voters had defected to Nixon than in 1968. Later, when they helped elect Ronald Reagan in 1980, they would be characterized as Reagan Democrats. Some left the Democratic Party permanently; many more became "independent" and swung between candidates of both major parties. In 1992, in reaction mainly to federal deficit spending, there was a huge swing to independent presidential candidate Ross Perot, who in early polling ran ahead of both President Bush and Clinton in the presidential race. Perot made one campaign pratfall after another. Yet, on election day, he gained 19 percent of the total popular vote, drawing support from alienated voters of both political parties.
The Vietnam War had required huge public expenditures and contributed to federal deficits during the Johnson and Nixon presidencies. President Reagan increased Pentagon spending as he strove to win the Cold War by forcing the Soviet Union into comparable spending that would break its economy. Then, after Clinton policies and a growing economy had restored the budget to balance, the events of 9/11 led President Bush to launch major interventions in Iraq and Afghanistan. During the same period Democrats and Republicans in Congress undertook a major domestic spending spree, with emphasis on "earmarks" that channeled billions in pork-barrel spending to their constituencies. Meantime, financial speculation and risk-taking were reaching their apex. The 2008-10 collapse followed.
Barack Obama took office in January, 2009, facing financial and economic crises for which he was not prepared. He chose initially to continue a financial-sector bailout designed in the Bush Treasury Department. One of its authors had been Tim Geithner, then president of the New York Federal Reserve. The bailout sent billions in public funds, with few strings attached, to the largest financial houses.
In forming his cabinet, Obama passed over Volcker, the hero of the post-Carter era, in favor of Geithner as Treasury Secretary. He largely delegated to Democratic congressional committee chairs the design of a nearly $1 trillion "stimulus package" which, regrettably, contained little immediate economic stimulus but instead steered money to favored congressional projects. His administration and Congress designed bailouts for the housing, auto, and banking sectors. That added further billions in federal debt and shifted unprecedented power from the private to the public sector.
Then, in a surprising move, Obama presented a plan to remake the health sector. Normally, such a plan would not have been attempted until financial and economic stability had been restored. Debate over the plan consumed a full year. It passed narrowly on what was largely a one-party basis and against majority public opinion. It, too, added to federal deficits. Even the most conservative official budget projections, in 2010, showed federal budget deficits of at least $1 trillion in each of the following 10 years.
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