The Disaster-Prone President

Whoever wins the presidency —and Barack Obama has taken a commanding lead —will inherit the worst financial mess since the 1930’s Great Depression.

Once markets calm down, finger pointing will begin. Primary responsibility for this global disaster appears to rest with the Bush administration’s reckless financial policies.

The roots of this crisis began before President Bush took office. Finance had already become America’s primary industry, accounting for 23 per cent of all economic activity (GDP) while manufacturing slipping at a mere 12 per cent. But under Bush and the Republican Party, the Wall Street titans of finance and moneylenders were allowed to run amok. In return, America’s financial industry became the largest contributor to the nation’s politicians.

By 2007, America had become so addicted to running on borrowed money (known as ‘leverage’) that the nation owed twice its net worth. Americans ceased saving, plunging instead into wild consumerism funded by loans on their homes. All of this was encouraged by the White House which was determined to keep the credit-fuelled good times rolling.

In 2008, in an act of supreme idiocy, the US Security and Exchange Commission bowed to pressure from the big five Wall Street banks and, after a mere 55 minutes of discussion, according to a New York Times’ investigation, changed the ‘net capital rule’ regulating the financial industry.

Hailed as a brilliant act of deregulation, the new rules allowed banks to lend out $30 for every $1 they had in reserves, almost doubling their ability to lend. Monitoring of their financial security was left to the banks themselves. In other words, the wolves were let into the sheep pen.

An orgy of reckless lending followed as banks vied to see who could make the more risky loans. No one cared as long as their profits and huge commissions kept rolling in. Sales of $40 million yachts and $50 million beach houses in the Hamptons surged.

The collapse of Lehman Brothers and ensuing world market panic marked the end of this era of financial debauchery. Wall Street’s export of fraudulent financial instruments undermined the world banking system and plunged it into a near death experience.

Former US President Jimmy Carter squarely blames the Bush administration this week for the disaster. Carter has charged that the world crisis was caused by Bush’s ‘profligate spending’ and dangerous tax cuts at a time when the US was spending nearly $1 trillion on the wars in Afghanistan and Iraq.

Carter warned that Bush’s massive foreign borrowing —$1 trillion from China and at least $500 billion from Japan —had fatally undermined the US economy. When Carter was president from 1977-1981, he inherited a dangerous inflation crisis caused by President Lyndon Johnson’s refusal to raise taxes to pay for the unpopular Vietnam War.

Johnson preferred to borrow to finance the war, setting off a storm of inflation that Carter had to deal with as president.

President Bush did the same thing with his failed wars, borrowed from Asia to finance them while cutting taxes at home. American taxpayers will repay these loans in coming years either through higher taxes or inflation —which is a form of indirect taxation.

The Bush administration inherited a $236 billion surplus from the Clinton presidency, low inflation, and a booming economy. Eight years later, the deficit stands at $407 billion and growing. Under Bush, government spending rose 16 per cent and military spending by 50 per cent. The size of government under Bush grew more than under any president since the Democrat Lyndon Johnson’s Great Society and Roosevelt’s New Deal.

While President Bush and the real power behind the throne, Vice President Dick Cheney, were obsessed waging war against Muslims, they ran the US economy onto the rocks.

Under their disaster-plagued tenure, the US plunged into huge deficits and waged two wars costing $1 trillion 
in Afghanistan and Iraq, invaded Somalia, and got whipped by Russia in Georgia.

Just when it seemed the hapless Bush White House could not create another disaster in its final days in office, they have given us the Panic of 2008 which could mark the beginning of the end of America’s super-power status. This is the Bush legacy.

Eric S Margolis is a veteran American journalist and contributing foreign editor of The Toronto Sun